As filed with the Securities and Exchange Commission on
April 2, 2010
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
PLANET BEACH FRANCHISING
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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7299
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72-1343492
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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5145 Taravella Road
Marrero, Louisiana
70072
(504) 361-5550
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Stephen P. Smith
Planet Beach Franchising
Corporation
5145 Taravella Road
Marrero, Louisiana
70072
(504) 361-5550
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Louis Y. Fishman
Maureen Brennan Gershanik
Fishman Haygood Phelps
Walmsley Willis & Swanson, L.L.P.
201 St. Charles Avenue, Suite 4600
New Orleans, Louisiana 70170
(504) 586-5252
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Michael A. Hedge
Joshua A. Lane
K&L Gates LLP
1900 Main Street, Suite 600
Irvine, California 92614
(949) 253-0900
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b2 of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller reporting
company)
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CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Aggregate Offering
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Amount of
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Title of Securities to be Registered
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Price(1)(2)
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Registration Fee
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Units, each unit consisting of:
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$11,500,000
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$820
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One share of common stock, $0.0001 par value
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(5)
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One warrant to purchase one share of common stock
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(5)
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Representatives warrants to purchase shares of common
stock, $0.0001 par value per share (3)
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$1,000,000
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$71.30
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Shares of common stock issuable upon exercise of warrants
included in the units, and upon exercise of the
representatives warrants
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$15,575,000(4)
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$1,110.50
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TOTAL
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$28,075,000
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$2,002
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(1)
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of
1933, as amended.
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(2)
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Includes the aggregate offering price of the units that may be
issued upon exercise of the underwriters over-allotment
option and the shares of common stock underlying the warrants
included in those over-allotment units.
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(3)
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In connection with the sale of the units, the registrant will
issue to the representative of the underwriters warrants to
purchase up
to shares
of common stock, par value $0.0001 per share.
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(4)
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Determined in accordance with Rule 457(i) based upon the
estimated exercise price of the warrants.
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(5)
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No fee required pursuant to Rule 457(g).
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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.
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 state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
APRIL 2, 2010
PRELIMINARY PROSPECTUS
Units
Units each consisting of one
Share of Common Stock and
one Common Stock Purchase
Warrant
This is the initial public offering of Planet Beach Franchising
Corporation. We are
offering
units, each consisting of one share of our common stock and one
redeemable common stock purchase warrant. The estimated initial
offering price is between $ and
$ per unit. The common stock and
warrants will trade as a unit for 35 days following the
date of this prospectus, after which the warrants will be
exercisable and the common stock and the warrants will trade
separately. For a more detailed description of our common stock,
see the section entitled Description of
Securities Common Stock on page 65 of
this prospectus, and for a more detailed description of the
warrants, see the section entitled Description of
Securities Warrants beginning on page 65
of this prospectus.
We will apply to list the units for trading on the NYSE Amex
under the symbol PBFCU beginning on or promptly
after the date of this prospectus. Once the shares and warrants
begin separate trading, we anticipate that the shares will be
listed on the NYSE Amex under the symbol PBFC and
the warrants will be listed on the NYSE Amex under the symbol
PBFCW, but we cannot assure you that any of the
securities offered by this prospectus will be so listed or, if
listed, will continue to be listed. Currently, there is no
public market for the units, our common stock or the warrants.
This investment involves a high degree of risk. We
urge you to read carefully the Risk Factors section
beginning on page 10 of this prospectus.
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Per Unit
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Total
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Public Offering Price
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$
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$
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Underwriting Discount
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$
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$
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Proceeds, Before Expenses, to Us
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$
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$
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We have granted the underwriters an option for a period of
30 days from the date of this prospectus to purchase up
to additional
units on the same terms and conditions set forth above to cover
over-allotments.
Please see Underwriting beginning on page 72 of
this prospectus for more information regarding our arrangements
with the underwriters.
Neither the Securities and Exchange Commission nor any state
securities commission nor any other regulatory body has approved
or disapproved of these securities or passed on the accuracy or
adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
The underwriters expect to deliver the units to purchasers on or
about ,
2010.
The date of this prospectus
is ,
2010.
TABLE OF
CONTENTS
You should only rely on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with additional information or
information different from that contained in this prospectus. We
are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where an offer or sale is
not permitted. You should assume that the information appearing
in this prospectus is accurate as of the date on the front cover
of this prospectus only, regardless of the time of delivery of
this prospectus or of any sale of our securities. Our business,
prospects, financial condition and results of operations may
have changed since that date.
This document may only be used where it is legal to sell these
securities. Certain jurisdictions may restrict the distribution
of these documents and the offering of these securities. We
require persons receiving these documents to inform themselves
about and to observe any such restrictions. We have not taken
any action that would permit an offering of these securities or
the distribution of these documents in any jurisdiction that
requires such action.
The Planet
Beach®
name and logo and the Contempo
Spa®
name are registered trademarks of Planet Beach Brands, L.L.C.
All rights reserved.
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Industry
and Market Data
Unless otherwise indicated, the market data and certain other
statistical information used throughout this prospectus are
based on independent industry publications, government
publications, reports by market research firms or other
published independent sources. Although we believe these
third-party sources are reliable, we have not independently
verified the information. None of the sources cited in this
prospectus has consented to the inclusion of any data from its
reports, nor have we sought their consent. In addition, some
data are based on our good faith estimates. Such estimates are
derived from publicly available information released by
independent industry analysts and third-party sources, as well
as our own managements experience in the industry, and are
based on assumptions we made based on such data and our
knowledge of the industry and markets, which we believe to be
reasonable. However, none of our estimates has been verified by
any independent source. Our estimates and assumptions involve
risks and uncertainties and are subject to change based on
various factors, including those discussed in the Risk
Factors section of this prospectus and the other
information contained in this prospectus. These and other
factors could cause our actual results to differ materially from
those expressed in the estimates and assumptions.
ii
SUMMARY
The items in the following summary are described in more
detail later in this prospectus. This summary provides an
overview of selected information and does not contain all the
information you should consider before investing in our
securities. Therefore, you should read this entire prospectus
carefully, especially the matters set forth under Risk
Factors, the consolidated financial statements and the
notes to those consolidated financial statements before making
an investment decision.
In this prospectus, unless indicated otherwise, references to
Planet Beach, the company,
we, us, or our, are
references to Planet Beach Franchising Corporation and its
wholly-owned subsidiaries, but do not include the stockholders
of Planet Beach Franchising Corporation.
U.S. dollars, dollars,
USD and $ refer to the legal currency of
the United States.
Overview
We believe we are the largest, full-service automated day spa
franchisor in the United States. We grant franchises for stores
operating under the Planet Beach name. As of January 15,
2010, we had 345 franchises located in 38 U.S. states,
Canada, Ireland, South Africa and Australia. We also had at that
date 20 additional franchises under development, including
proposed locations in one new state as well as in Egypt, Saudi
Arabia and Kuwait. In addition, at that date we had candidates
interested in
re-opening
16 previously closed locations, including one in an additional
state.
Our Contempo Spas offer our customers a unique experience by
providing high quality automated day spa services. These
services include automated massages and facials, ultra violet or
U-V light therapy and sunless tanning. We provide
automated spa services through equipment such as hydro massage
and facial machines that do not require a therapist or
aesthetician. Instead, a spa employee programs individual spa or
U-V sessions and sets the desired time of the session through
the stores point of sale software. The customer activates
the session by pressing a start button in the treatment room and
may adjust the settings according to his or her preferences on
certain equipment such as hydro massage units.
Our spas also offer a variety of skin care, U-V and nutritional
products, as well as an on-line nutritional service.
We establish most of our domestic franchises through
intermediaries whom we call area representatives. We
grant development territories to area representatives in return
for a territory development fee. These development territories
are geographic regions within which area representatives are
entitled to market franchises and are obligated to train,
support and provide guidance to franchisees in the territory.
Our area representatives are entitled to a percentage of the
fees we earn when we sell a new franchise or transfer an
existing franchise to a new franchisee in the area
representatives territory. In some circumstances, we also
pay a percentage of those fees for new or transferred franchises
outside the area representatives territory obtained as a
result of the area representatives efforts. Additionally,
our area representatives are entitled to a percentage of
collected royalties that we receive from our franchisees in
their territories.
We establish most of our international franchises through
persons we refer to as master franchisors. Our
agreements with our master franchisors give them the right to
grant Planet Beach franchises in their assigned geographic
region. The master franchisors develop their own franchise
system in their areas. For example, the master franchisors are
required directly, or through area representatives whom they
appoint, to sell, train, support and provide guidance to
franchisees in their areas. The master franchisors owe us a
master franchise fee when we appoint them as a master
franchisor, additional fees or royalties upon the sale of
franchises and a percentage of the revenues generated by
franchise outlets in the assigned area.
We require our franchisees and master franchisors to purchase
U-V and spa equipment, as well as certain U-V, skin care and
nutritional products, from us or from suppliers we designate. We
receive a royalty for equipment and products sold to our
franchisees and master franchisors directly by the designated
supplier. All of the equipment, and approximately 53% of the
products, are sold under the Planet Beach private label.
1
Our
Contempo Spa Concept
We were founded in 1996 as a U-V tanning franchise business.
However, in 2005, we substantially revised our business model to
adopt our Contempo Spa concept in response to the general
slowdown of sales in the tanning salon industry.
Our Contempo Spas offer U-V services along with traditional day
spa services such as facials, steam baths, and massages. These
spa services are performed by automated equipment such as
massage units or light therapy equipment, which reduces the
staffing that is required compared with a traditional day spa
operation. Reducing the number of trained and certified
employees required to operate a Planet Beach franchise results
in reduced operating costs and a greater return on investment.
The automated equipment at our Contempo Spas allows our
customers to take advantage of more services in less time and at
a lower cost than at a traditional day spa. Additionally, we
believe that the quality of individual services offered at each
repeat visit is more consistent than at a traditional day spa
where services are provided by a therapist or aesthetician.
We do not own any long-term exclusive rights to use the
equipment featured in our Contempo Spas, some of which is also
used in malls, airports, massage therapist offices, and some
tanning franchises. However, we are not aware of any significant
competitor that employs the same automated day spa concept that
we have developed, using the same type and quantity of equipment
that we do.
Our Contempo Spas include some, or all, of the following
automated equipment:
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aqua and hydro massage units that use heat and water pressure to
decrease muscle tension, and therasage and cyber-relax units
that reproduce the therapeutic benefits of a traditional
pressure massage;
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hydro-derma fusion stations that combine infrared heat and
nutrient-rich steam to moisturize the skin;
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luminous facial and hand units that use light therapy to improve
skin texture and tone, lighten age spots and diminish wrinkles;
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misting spa units that use a cool mist spray which prompts
cellular skin renewal to diminish fine lines and wrinkles and
improve skin elasticity;
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sunless tanning equipment that uses a tanning mist which is
sprayed onto the skins surface to create an artificial tan;
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teeth whitening equipment designed to restore teeth color;
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units that use infrared heating to deep heat the body and
aromatherapy for relaxation;
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equipment that leads customers through guided meditation and
relaxation sessions to reduce stress, improve mental clarity or
promote lifestyle changes, such as weight loss or smoking
cessation; and
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U-V light
beds.
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In addition to our spa services, our locations offer an array of
retail products and specialty items that enhance the Contempo
Spa experience, including U-V lotions, spa accessories, spa
hydration products, nutritional products, holistic and skincare
products, and promotional merchandise.
Our Sales
Platform and Customers
Our franchisees charge a monthly membership fee to customers for
different service offerings. Members can choose from different
service levels, some of which include only U-V services, while
others include U-V services, automated spa treatments and access
to our on-line NutritionSpa.com service, which provides
nutrition, skin wellness, and weight control information. At the
higher service levels, members receive reciprocation rights that
allow them to visit any of our spa locations without paying an
additional fee, and they have unlimited access to all of our
services at a monthly cost that is comparable to or lower than
the cost of a single visit at a traditional day spa. Our monthly
membership fees program results in a stable revenue stream for
our franchisees. Our locations also offer services on an
individual, non-membership basis, and an array of retail U-V,
skincare and nutritional products.
2
In fiscal 2009, our locations served approximately 561,000
customers. Of those customers, approximately 162,000 were Planet
Beach members. Membership data indicates that the average age of
those members was 31, and approximately 88% were female. We also
have a system-wide database of all current and former Planet
Beach customers, which contained approximately 2.1 million
people at December 31, 2009.
Our
Industry
According to the International SPA Association, or ISPA, the spa
industry recognized $12.8 billion and $10.9 billion of
revenue in 2008 and 2007, respectively, an increase of
approximately 17.5%. Spa visits increased from 138 million
visits in 2007 to 160 million visits in 2008, or 16%. ISPA
reports that at the end of 2008 there were 21,300 spas in the
U.S., a 19% increase since the end of 2007, when there were
17,900 U.S. spas. The number of spa locations in the
U.S. has increased at a five year average growth rate of
17%.
With the introduction of our nutritional and holistic skin care
lines, as well as our success at converting to the Contempo Spa
model, we have aimed to place ourselves in the wellness
industry, an industry that, according to Natural Marketing
Institute, experienced $200 billion in revenue through 2008.
Our
Competitive Strengths
We believe that we have the following competitive strengths:
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Brand Market Differentiation and Brand
Loyalty. We are not aware of any other
significant franchise in the U.S. that uses our business
model. We believe that our position as the first company to
market the Contempo Spa concept has the potential to create
significant market share for us that will solidify our presence
as the industry leader when other companies begin to compete
with us in this sector. Our membership reciprocation rights that
allow members to visit any of our spa locations without paying
an additional fee is an important part of our strategy to build
brand loyalty. We believe we can attract customers of our
tanning salon competitors by introducing them to our spa
services.
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Use of Automated Spa Equipment Reduces our Labor Costs and
Has Customer Appeal. Through the use of
automated, non-attended spa equipment, our franchisees are able
to reduce labor costs because no staff members need be present
during spa treatments. This format also allows franchisees to
offer customers competitive and value-oriented pricing. In
addition, we believe that the use of automated equipment is
attractive to an expanded client base that desires spa services
provided in less time and at comparable or lower cost than a
single visit to a traditional day spa. We believe this model
also has significant appeal in countries where social customs
emphasize greater personal modesty. Furthermore, we believe that
customers find the services provided by automated equipment are
more consistent in quality from visit to visit than services
provided by a therapist or aesthetician.
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Capacity for Expansion. We intend to add
customers by increasing our sales network and increasing the
number of our outlets both domestically and internationally. In
2010, we believe our growth in open locations will primarily
occur internationally. At the end of 2010, we expect that we
will have approximately 28 locations outside the U.S., which
would be an increase of approximately 22% in international
locations from December 31, 2009. We expect to return to a
more rapid growth rate domestically after we expand our
franchise marketing efforts using the proceeds of this offering.
We believe we have developed an infrastructure that we can now
leverage to increase our outlet base domestically and serve as a
model for our international outlet growth. We expect this
infrastructure will help us to accommodate our rapid growth
effectively without the need to hire a significant number of
additional employees.
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Our Membership-Based Revenue Model Provides us with a
Consistent Revenue Stream. We are in significant
part a membership-based service business. This membership model
creates a recurring, stable revenue stream for our franchisees
and, ultimately, for us, as compared to some of our competitors
who charge for their services on an individual basis.
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Experienced Management Team. Our management
team has substantial experience in franchising, as well as the
spa and U-V industries, and also has significant experience in
growing brands and in the retail environment.
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Our Convenient Locations Help to Increase Our Customer
Base. We desire to become the neighborhood
spa for our customer base by positioning our outlets
mainly in larger urban area shopping centers. We believe our
outlets are well positioned to attract our target demographic.
Based on our customer surveys, we believe our primary target
market consists of women ranging from 25 to 35 years old,
with annual incomes of between $50,000 and $100,000 per
household, and who have attended college. We believe our
secondary target market consists of women ranging from 36 to
50 years old, and men ranging from 30 to 50 years old,
with annual incomes of $50,000 to $100,000 per household, and
who have attended college.
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Our
Growth Strategy
We are committed to achieving our growth plan by pursuing the
following strategies:
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Increasing Overall Franchise Sales. Our
primary growth strategy is to increase the overall number of our
franchise locations. We intend to accomplish this through
increased marketing, including attending trade shows, as well as
brand development and increased advertising. In addition, we
intend to maintain a strong balance sheet, which will provide
potential franchisees with a certain level of confidence in our
financial position. To this end, we will use a portion of the
proceeds from this offering to reduce up to $1.8 million of
our current debt. Finally, we are continually exploring methods
to assist our franchisees in obtaining financing, which we
believe would remove the primary obstacle we have faced in
increasing our franchise sales since the third quarter of 2008.
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Conversion of Tanning Salons. The amount of
sales generated by a retail chains existing outlets over a
period of time is referred to as same store sales.
Same store sales are an important statistic because they
indicate what portion of our total revenue has been generated by
sales growth and what portion has been generated by the opening
of new stores. Our operating data suggests to us that our
Contempo Spa concept results in increased same store sales. At
January 15, 2010, 141, or 41%, of our franchise locations
had not yet converted to our Contempo Spa format, which includes
automated spa services, sunless tanning equipment and U-V
therapy services. Of these 141 locations, 25 provide only U-V
therapy services. We believe that the conversion of these 141
locations into our Contempo Spa concept should result in higher
per unit sales.
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International Expansion. We currently have
operating locations in Canada, Ireland, South Africa, and
Australia. We have sold a franchise in Egypt and expect a
location to open there in the Spring of 2010. We have entered
into master franchisor agreements, but do not yet have operating
locations, in Northern Ireland, the United Kingdom, Kuwait, and
Saudi Arabia. In addition, we are currently negotiating a master
franchisor agreement in the United Arab Emirates. We plan to
expand our brand further to other countries in Europe, New
Zealand, South America, Central America, the Middle East, and
Asia. In most cases, we enter into agreements and have
relationships only with our master franchisors, rather than the
individual franchisees. This arrangement reduces our costs and
therefore may result in higher profits for us over the long term.
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Product Development. We continue to evaluate
additional services that our franchisees might offer within our
Contempo Spa concept. The addition of new services at our
locations has historically resulted in new equipment sales and
improvement in same store sales. For example, we are currently
considering various sunless tanning services that would
complement our current products and services. In addition, we
periodically evaluate new franchise concepts that would
complement our core Contempo Spa business. We are now evaluating
a concept that would overlap with our existing customer base
without competing with the Planet Beach brand. In addition, it
would require a smaller initial investment by the franchisee
than is required for a Planet Beach franchise. We plan to begin
testing this concept in the late Spring and early Summer of
2010. We do not know when this testing will be
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complete, whether it will be successful, or, if it is
successful, when we might begin recruiting franchisees.
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Risks
Associated with Our Business
Our business is subject to numerous risks. Please see the
Risk Factors section beginning on page 10 of the
prospectus.
Corporate
Information
We were initially incorporated on September 26, 1996, under
the laws of the State of Louisiana. On March 25, 2008, we
reincorporated under the laws of the State of Nevada by merging
our predecessor Louisiana corporation into its newly-formed,
wholly-owned Nevada subsidiary. On March 18, 2010, we
changed our state of incorporation to Delaware by merging into
our newly-formed, wholly-owned Delaware subsidiary.
The address of our principal executive office is 5145 Taravella
Road, Marrero, Louisiana 70072, and our telephone number is
(504) 361-5550.
We maintain a website at www.planetbeach.com. The
information on, or that can be accessed through, our website is
not incorporated by reference into this prospectus and should
not be considered to be a part of this prospectus.
We conduct some of our operations through our wholly-owned
subsidiaries, principally Planet Beach International, LLC.
5
The
Offering
Units:
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Units offered by us
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units.
Each unit consists of one share of our common stock and one
redeemable common stock purchase warrant. |
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Public offering price of units |
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$
per unit. |
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Proposed NYSE Amex Symbol |
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PBFCU
The units are expected to be listed for trading on the NYSE Amex
as of the date of this prospectus. |
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Common Stock: |
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Common stock included in the units offered by us
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shares. |
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Common stock outstanding before the offering
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shares. |
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Common stock outstanding after the offering, before
exercise of any warrants
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shares. |
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Proposed NYSE Amex Symbol
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PBFC |
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The common stock included in the units is expected to be
separately listed on the NYSE Amex 35 days from the date of
this prospectus. |
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Warrants: |
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Common stock underlying warrants included in the
units offered by us
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shares. |
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Common stock outstanding after the offering,
assuming all warrants are exercised
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shares. |
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Proposed NYSE Amex symbol
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PBFCW |
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The warrants are expected to be separately listed on the NYSE
Amex 35 days from the date of this prospectus. |
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Exercisability |
|
Each warrant is exercisable for one share of common stock. |
|
Exercise price |
|
$ . |
|
Exercise period |
|
The warrants become exercisable 35 days from the date of
this prospectus and will expire at 5:00 p.m., New York
time,
on ,
2013, or upon earlier redemption. |
|
Redemption |
|
We may redeem the outstanding warrants at a price of
$ per warrant upon
15 days prior written notice if the closing price of
our common stock equals or exceeds
$ per share for a period of ten
consecutive trading days. |
|
Representatives warrants |
|
We have agreed to issue to the representative of the
underwriters warrants to purchase a total
of shares
of our common stock at a price per share equal to 120% of the
initial offering |
6
|
|
|
|
|
price, exercisable for a period beginning six months from the
date of this prospectus until the fifth anniversary of that date. |
|
Over-allotment option |
|
We have granted the underwriters an option for a period of
30 days to purchase up
to
additional units to cover over-allotments. |
|
|
|
If the underwriters exercise their over-allotment option in
full, we will
have shares
outstanding after this offering, before any warrants are
exercised,
and shares,
assuming all warrants, other than the representatives
warrants, are exercised. |
|
Proceeds to us |
|
We estimate the net proceeds from this offering, after deducting
underwriting discounts and commissions and estimated offering
expenses, would be approximately
$ million, or approximately
$ million if the underwriters
exercise their over-allotment option in full. |
|
|
|
We expect to use the net proceeds from this offering: |
|
|
|
for the purchase of up to 25 existing or recently
closed Planet Beach locations from our franchisees that we plan
to operate as company stores or resell as franchises;
|
|
|
|
to repay outstanding indebtedness of up to
$1.8 million;
|
|
|
|
for advertising and marketing to increase franchise
sales;
|
|
|
|
to develop new skincare and nutritional products;
|
|
|
|
to improve our corporate headquarters, which we use
as our primary training facility for new and existing
franchisees;
|
|
|
|
for working capital;
|
|
|
|
to develop new franchise concepts;
|
|
|
|
to purchase intellectual property rights; and
|
|
|
|
for general corporate purposes.
|
|
|
|
See the more detailed description of our expected use of the
proceeds of this offering under the heading Use of
Proceeds on page [ ] of this prospectus. |
|
Dividend policy |
|
We do not expect to pay dividends in the foreseeable future. |
|
Risk factors |
|
Investing in our common stock involves certain risks. You should
read Risk Factors beginning on
page [ ] for a discussion of factors that you
should consider carefully before deciding whether to purchase
the units. |
The number of shares of our common stock that will be
outstanding after this offering is based on
3,713,925 shares of our common stock outstanding as of
March 18, 2010, and excludes:
|
|
|
|
|
552,571 shares of our common stock issuable upon the
exercise of outstanding options under our 2005 Stock Option
Plan, all at an exercise price of $3.50 per share;
|
|
|
|
shares subject to an option held by one of our vendors to
convert balances due under our note payable within
12 months of this offering at a conversion price equal to
the initial public offering price; and
|
|
|
|
a number of shares issuable to one of our executive officers and
one employee in lieu of $13,632 of deferred cash compensation,
to be determined using the closing price of our common stock on
the
|
7
|
|
|
|
|
NYSE Amex on the first day that the warrants and shares we are
offering begin trading separately, and to be issued on that date.
|
Unless otherwise indicated, all information in this prospectus
assumes:
|
|
|
|
|
no exercise of the underwriters option to purchase
additional units;
|
|
|
|
no exercise of the warrants underlying the units sold in this
offering;
|
|
|
|
no exercise of the representatives warrants; and
|
|
|
|
a 1 for 3.5 reverse stock split of our common stock that we
effected when we changed our state of incorporation to Delaware.
|
8
Summary
Consolidated Financial Information
The following table summarizes selected financial data regarding
our business and should be read in conjunction with our
consolidated financial statements and related notes contained
elsewhere in this prospectus and the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The as adjusted
balance sheet data gives effect to this offering and the
application of the offering proceeds as described in Use
of Proceeds. The financial statement data as of and for
each of the fiscal years ended December 31, 2009, 2008 and
2007 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The historical
results presented below are not necessarily indicative of
results to be expected in any future periods, and do not reflect
our 1 for 3.5 reverse stock split effected March 18, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of spa equipment and products
|
|
$
|
4,920
|
|
|
$
|
14,706
|
|
|
$
|
17,586
|
|
Franchise fees
|
|
|
1,257
|
|
|
|
3,067
|
|
|
|
2,745
|
|
Royalties and related fees
|
|
|
6,883
|
|
|
|
6,833
|
|
|
|
5,585
|
|
Other
|
|
|
209
|
|
|
|
400
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue
|
|
|
13,269
|
|
|
|
25,006
|
|
|
|
26,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,693
|
|
|
|
11,132
|
|
|
|
13,369
|
|
Operating expenses
|
|
|
3,950
|
|
|
|
5,630
|
|
|
|
4,633
|
|
Salaries and bonuses
|
|
|
4,280
|
|
|
|
6,791
|
|
|
|
6,634
|
|
Commissions
|
|
|
1,580
|
|
|
|
2,013
|
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
13,503
|
|
|
|
25,566
|
|
|
|
26,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Operations
|
|
|
(234
|
)
|
|
|
(560
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
35
|
|
|
|
13
|
|
|
|
13
|
|
Interest expense
|
|
|
(256
|
)
|
|
|
(219
|
)
|
|
|
(174
|
)
|
Realized gain (loss)
|
|
|
(253
|
)
|
|
|
8
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(474
|
)
|
|
|
(198
|
)
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Provision For Income Taxes
|
|
|
(708
|
)
|
|
|
(758
|
)
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes (benefit)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Net Income (Loss)
|
|
$
|
(708
|
)
|
|
$
|
(758
|
)
|
|
$
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.03
|
)
|
Weighted Average Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Basic and Diluted
|
|
|
12,998,739
|
|
|
|
12,971,046
|
|
|
|
12,961,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
|
Actual
|
|
As Adjusted
|
|
|
(In thousands)
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(1)
|
|
$
|
(705
|
)
|
|
$
|
(617
|
)
|
|
$
|
238
|
|
|
$
|
|
|
Current assets
|
|
|
1,926
|
|
|
|
2,944
|
|
|
|
4,166
|
|
|
|
|
|
Total assets
|
|
|
4,934
|
|
|
|
5,966
|
|
|
|
6,517
|
|
|
|
|
|
Current liabilities
|
|
|
2,631
|
|
|
|
3,561
|
|
|
|
3,935
|
|
|
|
|
|
Total liabilities
|
|
|
6,239
|
|
|
|
6,900
|
|
|
|
6,533
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
(1,305
|
)
|
|
|
(934
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
(1) |
|
Working capital is defined as current assets minus current
liabilities. |
9
RISK
FACTORS
An investment in our securities involves a high degree of
risk. You should carefully consider the risks described below,
together with all of the other information included in this
prospectus, before making an investment decision. If any of the
following risks actually occur, our business, financial
condition or results of operations could suffer. In that case,
the value of our units, common stock and warrants could decline,
and you may lose all or part of your investment. The risks
described below are not the only ones we face. Additional risks
that we currently do not know about or that we currently believe
to be immaterial may also impair our operations and business
results.
Risks
Related To Our Business
If we
are unable to sell new franchises, or open new spas on time, our
revenue growth rate and profits may decline.
To expand our business, we must constantly identify new
franchise opportunities. In addition, our franchisees must open
new spas on schedule and in a profitable manner. In the past,
our franchisees have experienced delays in spa openings due
primarily to the difficulty in obtaining financing, and they may
experience similar delays in the future. Delays or failures in
opening new franchises could hurt our ability to meet our growth
objectives, which may affect the expectations of securities
analysts and others and thus the trading price of our
securities. We or our franchisees may not be able to achieve our
expansion goals and our new spas may not be operated profitably.
Further, any spas that our franchisees open may not obtain
operating results similar to those of our existing spas. Our
ability to expand successfully will depend on a number of
factors, many of which are beyond our control. Among other
things, we must:
|
|
|
|
|
attract and retain qualified franchisees;
|
|
|
|
recruit, train and retain qualified corporate personnel and
management;
|
|
|
|
create customer awareness of our spas in new markets;
|
|
|
|
compete in our markets; and
|
|
|
|
adjust to general economic conditions.
|
In addition, our franchisees must:
|
|
|
|
|
locate suitable spa sites in new and existing markets;
|
|
|
|
obtain acceptable financing for construction of new spas or
negotiate acceptable lease terms;
|
|
|
|
plan, design and build out spas in a cost-effective and timely
manner; and
|
|
|
|
obtain and maintain required local and state governmental
approvals and permits related to the construction and operation
of the sites.
|
If we fail to identify new franchise opportunities, or our
franchisees fail to open new spas on time, our future revenues
may be adversely impacted.
Deteriorating
national and global economic conditions have negatively impacted
the demand for our products and services and the ability of our
franchisees to obtain financing for new franchises, and these
conditions may worsen.
Our business has been adversely affected by deteriorating
national and global economic conditions, including unemployment
levels, unfavorable interest rates, the lack of availability of
credit on reasonable terms, changes in consumer spending rates
and habits, and rising energy costs. These conditions have
negatively impacted consumer demand for personal care products
and services, consumers ability to afford our products and
services, and consumer habits with respect to how they spend
their disposable income. Our business could be further
negatively impacted if conditions deteriorate or efforts and
initiatives of the
10
governments of the United States and other countries to manage
and stimulate the economy fail or result in worsening economic
conditions.
In addition, the disruptions in credit and other financial
markets caused by deteriorating national and international
economic conditions have caused our franchisees to experience
great difficulty over the past 18 months in obtaining new
credit on reasonable terms, and extensions of existing credit.
As a result, we have had difficulty maintaining open locations,
selling additional franchises and expanding our business. If
these conditions continue, they could further impair the
financial condition of our company and that of our franchisees,
as well as our suppliers, making it difficult or impossible for
us to meet our respective obligations and to grow our company.
We are
dependent on franchisees and their success.
Our performance depends upon our ability to attract and retain
qualified franchisees and the franchisees ability to
execute our concept and capitalize upon our brand recognition
and marketing. Our inability to recruit franchisees who have the
business skill, experience and financial resources necessary to
open spas on schedule, and who will conduct operations in a
manner consistent with our concept and standards, will have an
adverse effect on our business and results of operations.
Our
franchisees may take actions that could harm our
business.
Franchisees are independent contractors and are not our
employees. We provide training and support to franchisees, but
the quality of franchised spa operations may be diminished by
any number of factors beyond our control. Our franchisees may
not have the business acumen or financial resources necessary to
operate successful franchises in their franchise areas.
Consequently, franchisees may not operate spas in a manner
consistent with our standards and requirements, or may not hire
and train qualified managers and other spa personnel. If
franchisees do not adequately manage their spas, our image and
reputation, and the image and reputation of other franchisees,
may suffer materially, and system-wide sales could significantly
decline. The interests of franchisees may conflict with our
interests. For example, whereas franchisees are concerned with
individual business strategies and objectives, we are
responsible for ensuring the success of the entire range of our
products and services. In addition, we may also face potential
claims and liabilities due to the acts of our franchisees based
on agency or vicarious liability theories.
We may
require additional capital and we may not be able to obtain it
on acceptable terms or at all.
We have had net losses of $708,000, $758,000 and $325,000 for
the 2009, 2008 and 2007 fiscal years, respectively. Future
operating losses would have an adverse effect on our
stockholders equity and working capital. As of
December 31, 2009, we had cash and cash equivalents of
$53,810, including escrow cash. We may need additional capital,
and our needs may increase due to a change in business
conditions, our inability to achieve our targeted growth
milestones, a decline in same store sales or other future
developments that negatively affect our cash flows from
operations.
If our resources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt
securities or obtain additional credit facilities. The sale of
additional equity securities could result in dilution to our
stockholders. The incurrence of indebtedness would result in
increased debt service obligations and could require us to agree
to operating and financing covenants that would restrict our
operations. Our ability to obtain additional capital on
acceptable terms is subject to a variety of uncertainties,
including:
|
|
|
|
|
investors perception of, and demand for, securities of
United States-based companies involved in the franchise
distribution business;
|
|
|
|
conditions of the U.S. and other capital markets in which
we may seek to raise funds;
|
|
|
|
our future results of operations, financial condition and cash
flows; and
|
|
|
|
economic, political and other conditions in United States and
other international markets where we may seek to establish a
presence.
|
11
Financing may not be available in amounts or on terms acceptable
to us, if at all. If we fail to raise additional funds on terms
favorable to us, or at all, our business, financial condition
and results of operations could be materially adversely affected.
Our
industry is highly competitive, and if we are unable to compete
effectively and gain market share, our financial condition could
be negatively affected.
Our market is fragmented with few barriers to entry, and we face
intense competition for customers and suitable store locations.
We compete with both tanning salons and day spas, whether
independently owned or franchised. At the franchise level, we
compete with other franchisors for potential franchisees, and
the primary competitive factor at this level is the amount of
the investment the franchisee must make. If we fail to maintain
or improve our market position and respond successfully to
changes in the competitive landscape, our business and results
of operations may suffer.
We may
not be able to respond to changing trends in a timely manner,
which could have a material adverse effect on us.
We operate in a market characterized by possible rapid changes
in consumer patterns and buying power. Buying power with respect
to personal care products and services is driven by general
economic factors, such as personal income levels, inflation and
interest rates. We design our sales and marketing strategy to
respond to changes in consumer patterns relating to general
trends for shopping locations. There is a risk that we may lose
some of our popularity among customers. If we cannot respond
rapidly to changes in our industry, then we may lose market
share to our competitors who are able to respond more rapidly
and our financial condition and results of operation would be
negatively affected. Additionally, even though we may respond to
changing consumer trends, we may not be able to convince our
franchisees to adopt our recommendations in a timely manner or
at all.
The
infringement of our trademarks and other intellectual property,
or the erosion of our brand, could substantially harm our
business.
The Planet Beach and Contempo Spa trademarks and other marks are
vital to maintaining our brand awareness and competitive
position. Protecting our intellectual property rights and
combating unlicensed copying of our marks and other intellectual
property can be difficult and costly. This is because we may be
required to initiate litigation or other action to enforce our
rights or establish their validity. As we expand our brand
globally, protecting our intellectual property rights may be
more challenging, because we may expand to countries where laws
are less protective of these rights. We devote substantial
resources to the establishment and protection of these
trademarks and other proprietary rights. However, these measures
may be inadequate to prevent imitation of our products and
concepts by others. If we are unable to protect our marks and
our brand, or if our brand becomes confused with the business of
our competitors, our business could suffer substantially.
We
have operated as a private company and have no experience
attempting to comply with public company obligations. Attempting
to comply with these requirements will increase our costs and
require additional management resources, and we still may fail
to comply.
We have operated as a private company and have not been subject
to many of the requirements applicable to public companies. Laws
and regulations affecting public companies, including the
provisions of the Sarbanes-Oxley Act of 2002 and the rules
related to corporate governance and other matters subsequently
adopted by the Securities and Exchange Commission, or SEC, and
the NYSE Amex, will result in increased administrative, legal
and accounting costs to us. The impact of these events and
heightened corporate governance standards could also make it
more difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as
executive officers. If we fail to comply with these
requirements, the trading market for our securities may be
negatively impacted and the trading price for our stock may
decrease.
12
We may
be exposed to potential risks relating to our internal controls
over financial reporting and our ability to have the operating
effectiveness of our internal controls attested to by our
independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of
2002, the SEC adopted rules requiring public companies to
include a report from management on the companys internal
controls over financial reporting in their annual reports,
including annual reports on
Form 10-K.
In addition, the independent registered public accounting firm
auditing a companys financial statements must attest to
and report on the operating effectiveness of a companys
internal controls. These rules will apply to us beginning with
our annual Report on
Form 10-K
for our 2010 fiscal year. Our independent registered public
accounting firm may issue an adverse opinion on our internal
controls over financial reporting if one or more material
weaknesses are identified. We have no prior experience with
internal control audits and we may not be able to comply with
all of the requirements imposed by Section 404 or we may
not receive a positive attestation from our independent
auditors. If we identify significant deficiencies or material
weaknesses in our internal controls that we cannot correct in a
timely manner or we are unable to receive the required
attestation from our independent auditors with respect to our
internal controls, investors and others may lose confidence in
the reliability of our financial statements. A significant
financial reporting failure could cause an immediate loss of
investor confidence in our company and a sharp decline in the
market price of our common stock.
We
experience fluctuations in operating results which may
negatively affect our financial condition.
Our annual and quarterly operating results have fluctuated and
are expected to continue to fluctuate. Among the factors that
may cause our operating results to fluctuate are customers
response to product and service offerings, the timing of the
rollout of new sales outlets, seasonal variations in sales, the
timing of merchandise receipts, the level of merchandise
returns, changes in service and merchandise mix and
presentation, our cost of service and merchandise, unanticipated
operating costs, and other factors beyond our control, such as
general economic conditions and actions of competitors. As a
result of these factors, we believe that period-to-period
comparisons of historical and future results will not
necessarily be meaningful and should not be relied on as an
indication of future performance.
Complaints
or litigation by our franchisees may harm our
business.
We occasionally have disputes with our franchisees, and some of
these disputes result in litigation against us. These actions
arise in the ordinary course of our business. Regardless of
whether any claims against us are valid or whether we are
liable, claims may be expensive to defend and may divert time
and money away from our operations and hurt our performance. In
addition, various state and federal laws govern our relationship
with our franchisees and potential sales of our franchised spas.
If we fail to comply with these laws, we could be liable for
damages to franchisees and fines or other penalties. Any
uninsured judgments or judgments significantly in excess of our
insurance coverage for any claims could materially adversely
affect our financial condition or results of operations.
Further, adverse publicity resulting from these allegations may
materially adversely affect us and our franchisees.
Lawsuits
by customers alleging injuries sustained while using our
services could harm our business.
Our customers must sign a form indicating they understand the
potential dangers of U-V beds, which include eye and skin
injury, allergic reactions, premature aging of the skin and skin
cancer. Nevertheless, it is possible that a customer may be
injured or have other health problems related to overexposure to
U-V equipment, malfunctioning equipment or the effects of our
products, or allege such claims, and seek redress from us. Any
insurance we might obtain for these types of claims will be
subject to deductibles and coverage limitations. In addition,
the coverages may not be adequate to protect us against future
claims. Any claim with respect to uninsured liabilities or for
amounts in excess of insured liabilities could have an adverse
effect on our business, operating results and prospects.
Defending a suit, regardless of merit, could be costly, could
divert managements attention from our business and might
result in adverse publicity, which could result in the
withdrawal of, or inability to recruit, prospective franchisees
or result in brand deterioration. In addition to adversely
impacting our business and prospects, such adverse publicity
could materially adversely affect our stock price.
13
Our
current insurance may not provide adequate levels of coverage
against claims.
We currently maintain insurance customary for businesses of our
size and type. However, in many cases, such insurance is
expensive and some coverages are difficult to obtain. We cannot
assure you that we can maintain, on reasonable terms, sufficient
coverage to protect us against all the losses we might incur.
Adverse
public or medical opinions about the health effects of our
services could harm our business or could lead to additional
regulation that could harm our business.
Medical opinions and opinions of commentators in the general
public regarding negative health effects of some of our products
and services, such as our U-V services, could adversely impact
our future revenue. Although our industry is highly regulated by
federal and state government agencies, negative publicity
regarding the health effects of some of the products and
services we offer could lead to adverse legislation or further
regulation of the industry, which could have a negative impact
on our profit margins as well as the trading price of our
securities.
Although we have shifted our business model away from emphasis
on U-V tanning, we still offer U-V services, and despite our
warnings, some of our customers may continue to use our U-V
equipment for tanning. The continuation of our U-V services is
dependent upon the consuming publics sustained belief that
the benefits of U-V treatments outweigh the risks of exposure to
ultraviolet light. Any significant change in public perception
of U-V equipment caused by scientific studies, government
reports, rumors or otherwise that link U-V equipment to a
significant increase in the likelihood of skin cancer or other
skin diseases, could have a material adverse effect on our
business, financial condition and results of operations. For
example, the federal health care bill signed into law in March
2010 contains a 10% tax on U-V tanning services that will take
effect on July 1, 2010. We have not yet determined whether
this tax will be imposed on our spa memberships, but we believe
it would apply to sales of individual U-V therapy sessions and
could have a chilling effect on demand for U-V services
generally.
In addition, a Food and Drug Administration advisory panel
recently recommended that the agency consider actions such as
requiring that teenagers get parental consent before using a
tanning bed or even banning the use of tanning beds among teens.
The panel also recommended reclassifying tanning lamps from
Class I medical devices a category that
includes tongue depressors and elastic bandages to a
Class II or Class III device, which would permit the
agency to impose greater restrictions. According to the
International Agency for Research on Cancer, which is affiliated
with the World Health Organization, or WHO, people under 30 who
use tanning machines increase their risk of skin cancer by 75%.
The WHO last July listed ultraviolet radiation-emitting beds as
carcinogenic to humans, its highest category of
cancer risk.
Our
earnings and business growth strategy depends in large part on
the success of our suppliers and franchisees, and our reputation
may be harmed by actions taken by these parties that are outside
of our control.
Our growth strategy, including our plans for new stores, new
products and services, branded products built to our
specifications and other initiatives, relies significantly on
our relationships with our suppliers and franchisees. For
example, we sell several products under the Planet Beach
trademark that are manufactured by third parties and we require
our franchisees to use U-V and spa equipment manufactured by
third parties that have relationships with us. We provide
specifications to these suppliers, but the product quality they
deliver to our franchisees may be diminished by any number of
factors beyond our control. We believe that customers expect
high quality products and services from our franchisees at a
competitive price, and that any shortcoming of our franchisees
or suppliers, particularly an issue regarding the quality of the
service provided or the safety of products sold, may be
attributed by customers to our company, thus damaging our
reputation and brand value and potentially affecting our results
of operations.
14
We
must identify and obtain a sufficient number of suitable new spa
sites for us to sustain our revenue growth rate.
We require that all proposed spa sites meet site-selection
criteria established by us. We and our franchisees may not be
able to find sufficient new sites to support our planned
expansion in future periods. We face significant competition
from other spa companies and retailers for sites that meet our
criteria and the supply of sites may be limited in some markets.
As a result of these factors, our franchisees costs to
obtain and lease sites may increase, or they may not be able to
obtain certain sites at a cost they can afford. This may, in
turn, reduce our growth rate.
Our
spas may not achieve market acceptance in the new geographic
regions we enter.
Our expansion plans include opening spas in new markets where we
or our franchisees have little or no experience. The success of
these new spas will be affected by the different competitive
conditions, consumer preferences, discretionary spending
patterns, and social customs in the new markets as well as our
ability to generate market awareness of the Planet Beach brand.
Sales at spas opening in new markets may take longer to reach
average annual spa sales, if at all, thereby affecting the
profitability of these franchises and ultimately our
profitability.
Because
we do business internationally, our business could be harmed if
changes in political or economic stability, laws, exchange rates
or foreign trade policies should occur.
Sales of our franchises in foreign markets and our relationships
with our foreign suppliers will subject us to the risks of doing
business abroad. Longer lead times may be required for the
manufacture of equipment according to foreign specifications for
our international locations, which could reduce our flexibility.
Other risks of doing business internationally include political
or economic instability, any significant fluctuations in the
value of the dollar against foreign currencies, terrorist
activities and restrictions on the transfer of funds. Any
material disruption to our operations caused by such events may
have an adverse affect on our business.
Because
of our international operations, we are subject to the Foreign
Corrupt Practices Act. A determination that we violated this act
may affect our business and operations adversely.
As a U.S. corporation, we are subject to the regulations
imposed by the U.S. Foreign Corrupt Practices Act, or the
FCPA, which generally prohibits U.S. companies and their
intermediaries from making improper payments to foreign
officials for the purpose of obtaining or keeping business. Any
determination that we have violated the FCPA could have a
material adverse effect on our financial position, operating
results and cash flows.
The
loss of key personnel or difficulties recruiting and retaining
qualified personnel could jeopardize our ability to meet our
growth targets.
Our future growth depends substantially on the contributions by
and abilities of key executives and other employees. We must
continue to recruit, retain and motivate management and other
employees sufficient to maintain our current business and
support our projected growth. A loss or significant shortage of
high quality employees could jeopardize our ability to meet our
growth plan.
Stephen Smith has been very important to our success.
Mr. Smith is one of our founders, our principal stockholder
and our Chairman, President and Chief Executive Officer. The
loss of Mr. Smiths services could have a significant
negative effect on us.
Implementing
our expansion strategy may strain our resources.
Our expansion strategy may strain our management, financial and
other resources. We must attract and retain talented franchisees
to maintain the quality and service levels at our existing and
future spas. Additionally, we must continue to enhance our
operational, financial and management systems. We may not
15
be able to manage these or other aspects of our expansion
effectively. If we fail to do so, our business, financial
condition, operating results and cash flows could suffer.
Further, our anticipated growth could place additional strain on
our third party suppliers, resulting in increased need for us to
monitor carefully our relationships with these suppliers. Any
failure by us to manage these relationships effectively could
have an adverse effect on our ability to expand.
Our
franchises may not be able to obtain and maintain licenses and
permits necessary to operate our spas.
Our industry is subject to various state and local government
regulations, including state regulations requiring a license to
operate U-V light beds or obtain industry certifications. Such
regulations are subject to change from time to time. The failure
of our franchisees to obtain and maintain these licenses,
permits and approvals could adversely affect our operating
results. Difficulties or failure to obtain the required licenses
and approvals could delay or result in our decision to cancel
the opening of new franchises. Local authorities may revoke,
suspend or deny renewal of required licenses if they determine
that our franchisees conduct violates applicable
regulations.
Risks
Related to This Offering and the Market for Our Equity
Securities Generally
No
market currently exists for the trading of our securities and no
market may ever develop. Accordingly, you may not have any means
of trading the units you acquire in this offering or the
underlying shares or warrants.
A market does not currently exist for our securities and an
active market may never develop or be sustained. Consequently,
you may not be able to liquidate your investment in our
securities for an emergency or at any time, and the securities
will not be readily acceptable as collateral for loans. Although
we will try to establish an active trading market for our
securities on the NYSE Amex, the market may not be sufficiently
liquid to enable an investor to liquidate his or her investment
in us at a time and at a price he or she feels are fair or
appropriate.
Furthermore, the market price of our units, and ultimately our
common stock and warrants, may decline below the initial public
offering price of the units. The initial public offering price
will be determined through negotiations between us and the
representative of the underwriters and may not be indicative of
the market price of our securities following this offering.
Among the factors considered in such negotiations are prevailing
market conditions, certain of our financial information, market
valuations of other companies that we and the representative of
the underwriters believe are comparable to us, estimates of our
business potential and the present state of our business. See
Underwriting for additional information.
The NYSE Amex will require that we meet minimum criteria to
continue listing our securities for trading. Among the criteria
are a minimum stock price. If we fail to meet the listing
criteria, our securities could be delisted, and as a result,
there may not be a liquid trading market for the securities you
purchase in this offering.
You
will experience immediate and substantial dilution if you invest
in this offering, and you may experience additional dilution in
the future.
If you purchase securities in this offering, you will experience
immediate and substantial dilution because the public offering
price of a unit will be substantially greater than the tangible
book value attributable to the shares of our common stock
included in a unit after giving effect to this offering. In the
past, we have issued options to acquire shares of common stock
at prices significantly below the public offering price of a
share of our common stock (assuming no value is attributed to
the redeemable warrants included in the units). To the extent
these options are ultimately exercised, you will incur further
dilution.
16
The
price of our securities may be volatile.
The market price of our securities could be subject to wide
fluctuations in response to factors such as the following, many
of which are beyond our control:
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quarterly variations in our operating results, or results that
vary from the expectations of the investment community;
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changes in investor perceptions of the our industry in general,
including our competitors; and
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general economic and competitive conditions.
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In addition, purchases or sales of large quantities of our stock
could have an unusual effect on our market price.
We may
be subject to penny stock regulations and restrictions and you
may have difficulty selling shares of our common
stock.
The SEC has adopted regulations defining and governing so-called
penny stocks, which are equity securities of small
companies that have a market price of less than $5.00 per share
or an exercise price of less than $5.00 per share, subject to
certain exemptions. If our securities become penny
stocks, we may become subject to these rules. The rules
impose additional sales practice requirements on broker-dealers
that sell penny stocks to persons who are not established
customers or accredited investors (generally,
individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with their
spouses). In addition, the broker-dealer must make a special
suitability determination for the purchaser and receive the
purchasers written consent to the transaction prior to
sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the ability
of purchasers to sell any of our securities in the secondary
market.
For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny
stock, of a disclosure schedule prepared by the SEC relating to
the penny stock market. Disclosure is also required to be made
about sales commissions payable to both the broker-dealer and
the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in
the account and information on the limited market in penny stock.
Our common stock may not qualify for exemption from the penny
stock rules. In any event, even if our common stock were exempt
from the penny stock rules, we would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the SEC
the authority to restrict any person from participating in a
distribution of penny stock if the SEC finds that such a
restriction would be in the public interest. If our securities
are subject to the penny stock rules, it could negatively impact
the trading market and trading price of our securities.
The
concentration of our capital stock ownership with our founders
will limit your ability to influence corporate
matters.
Each share of our common stock has one vote per share on matters
coming before our stockholders. After this offering, assuming
the exercise of all outstanding options, but before the exercise
of any warrants, our three founders will still own approximately
54.5% of our outstanding common stock. Therefore, our founders
will be able to control our company, including our ability to
engage in a merger, sale of our assets, liquidation or
dissolution or similar fundamental transactions. As a result,
your ability to influence corporate matters will be limited and
we may take actions that our stockholders do not view as
beneficial. The market price of our units, common stock and
warrants could also be adversely affected by this structure.
Following
this offering, members of our management team may enter into an
agreement providing, among other things, that they will vote
their shares together.
After this offering, members of our senior management may enter
into an agreement providing that they will vote their shares in
accordance with the majority in interest of the total shares
held by all of the parties to
17
the agreement. The agreement may have other terms, such as a
right of first refusal in the other parties to the agreement if
any party desires to sell his or her shares of the company. The
effect of this agreement may be to concentrate a measure of
control of our company in a small group of executives.
We may
invest or spend the proceeds of this offering in ways with which
you may not agree or in ways which may not yield a significant
return, if any.
Our board of directors and management will have broad discretion
over the use of proceeds from this offering. The net proceeds
from this offering will be used to fund the acquisition of
existing or recently closed franchise locations, repay debt, and
for other purposes more fully described in this prospectus under
Use of Proceeds. Our board of directors and
management will have considerable discretion in the application
of the net proceeds, and you will not have the opportunity, as
part of your investment decision, to assess whether the proceeds
are being used appropriately. The net proceeds may be used for
corporate purposes that do not increase our operating results or
market value. Until the net proceeds are used, they may be
placed in investments that do not produce significant income or
investments that lose value.
We do
not anticipate paying any cash dividends in the foreseeable
future.
We currently intend to retain any future earnings to fund the
development and growth of our business. We do not anticipate
paying any cash dividends on our common stock in the foreseeable
future. As a result, capital appreciation, if any, of our common
stock will be your sole source of gain for the foreseeable
future.
Shares
eligible for future sale may cause the market price of our
securities to decline, even if our business is doing
well.
Based on shares outstanding as of March 18, 2010, we will
have shares
of common stock outstanding upon the completion of this offering
and before the exercise of any warrants. Upon completion of this
offering, approximately 3,428,955 shares and 444,282
additional shares subject to options held by our directors and
executive officers and greater than one percent stock or option
holders will be subject to
lock-up
agreements with the underwriters, restricting the sale of such
shares for one year after the date of this prospectus, although
these
lock-up
agreements may be extended for up to an additional 34 days
under certain circumstances. These
lock-up
agreements are subject to a number of exceptions and holders may
be released from these agreements without prior notice at the
discretion of the underwriters. After the
lock-up
agreements expire, these shares will be eligible for sale in the
public market, and are subject to volume limitations under
Rule 144 under the Securities Act of 1933, as amended, or
the Securities Act. In addition, the 552,571 shares of our
common stock that are subject to outstanding options under our
Stock Option Plan as of March 18, 2010 will be eligible for
sale in the public market to the extent permitted by the
provisions of the various vesting agreements, the
lock-up
agreements and Rules 144 and 701 under the Securities Act.
Further, we will also have outstanding unexercised warrants
included in the units we are offering in this prospectus and the
representatives warrants that will be exercisable
for
shares of our common stock. If any of these additional shares
are sold, or it is perceived they will be sold, the trading
price of our common stock could decline. These sales also might
make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem
reasonable or appropriate.
If
securities or industry analysts do not publish research or
reports about our business, if they change their recommendations
regarding our securities adversely or if our operating results
do not meet their expectations, our stock price and trading
volume could decline.
The trading market for our securities could be influenced by the
research and reports that industry or securities analysts
publish about us or our business. If we have such coverage and
one or more analysts cease coverage of us or fail to publish
reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover us downgrade our stock or if our operating
results do not meet their expectations, our stock price could
decline.
18
Our
charter and bylaws contain certain provisions that may
discourage a takeover of our company and our board of directors
may adopt additional anti-takeover measures after we complete
this offering.
Our charter and bylaws contain measures that may impede or
discourage attempts to acquire control of our company without
the approval of our board of directors. These include a
classified board of directors, advance notification requirements
for stockholders to nominate persons for election as directors
and to make stockholder proposals and the inability of
stockholders to call special meetings of stockholders. After
this offering, our board of directors may adopt other measures
to discourage a takeover of our company, as described under
Description of Our Securities. These measures, if
adopted, would permit our board to choose not to entertain
offers to purchase our company, even offers that are at a
substantial premium to the market price of our stock. As a
result, our stockholders may be deprived of opportunities to
profit from a sale of control. This could, in turn, reduce the
market price of our securities. See the section entitled
Description of Our Securities elsewhere in this
prospectus.
We
have the right to redeem the warrants issued as part of the
units, which could impact the trading price of the
warrants.
We may redeem the warrants issued as part of the units for
$ per warrant upon
15 days prior written notice, provided that the
closing price of our common stock equals or exceeds
$ (subject to adjustment), for ten
consecutive trading days. If we redeem the warrants, you will
lose your right to exercise the warrants except during the
15-day
redemption period. Redemption of the warrants could force you to
exercise the warrants at a time when it may be disadvantageous
for you to do so or to sell the warrants at the then market
price or accept the redemption price, which likely would be
substantially less than the market value of the warrants at the
time of redemption.
If you
purchase or hold the warrants, you will not be entitled to any
rights as a stockholder on the common stock underlying the
warrants, but you will be subject to all changes made with
respect to our common stock.
If you purchase or hold the warrants, you will not be entitled
to any rights as a stockholder (including, without limitation,
voting rights and rights to receive any dividends or other
distributions on our common stock) on the common stock
underlying the warrants, other than the right to adjustments in
the exercise price of the warrants upon certain events, but such
shares will be subject to all changes to our charter and bylaws
affecting the common stock. You will only be entitled to rights
as a stockholder on the common stock underlying the warrants if
and when we deliver shares of common stock to you upon the
exercise of your warrants. For example, in the event that an
amendment is proposed to our certificate of incorporation or
bylaws requiring stockholder approval and the record date for
determining stockholders of record entitled to vote on the
amendment occurs prior to the exercise of your warrants, you
will not be entitled to vote the shares of common stock
underlying your warrant on the amendment, although the common
stock you receive upon exercise of your warrant will
nevertheless be subject to any changes in the powers,
preferences or special rights of our common stock.
Certain
warrant holders are unlikely to receive direct notice of
redemption of our warrants.
We expect some holders of our warrants will hold their
securities through one or more intermediaries, and consequently
they are unlikely to receive notice directly from us that the
warrants are being redeemed. If you fail to receive notice of
redemption from a third party and your warrants are redeemed for
nominal value, you will not have recourse against us.
19
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements intended to
qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995, as amended.
These forward-looking statements are subject to a number of
risks and uncertainties, many of which are beyond our control.
All statements, other than statements of historical fact,
contained in this prospectus, including statements regarding
future events, our future financial performance, business
strategy and plans and objectives of management for future
operations, are forward-looking statements.
We have attempted to identify forward-looking statements by
terminology including anticipates,
believes, can, continue,
could, estimates, expects,
intends, may, plans,
potential, predicts, should
or will or the negative of these terms or other
comparable terminology. Although we do not make forward-looking
statements unless we believe we have a reasonable basis for
doing so, we cannot guarantee their accuracy. These statements
are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks outlined
under Risk Factors or elsewhere in this prospectus,
which may cause our or our industrys actual results,
levels of activity, performance or achievements to be materially
different from any future results, levels of activity,
performance or achievements expressed or implied by these
forward-looking statements. Moreover, we operate in a very
competitive and rapidly changing environment. New risks emerge
from time to time and it is not possible for us to predict all
risk factors, nor can we predict the impact of all factors on
our business or the extent to which any factor, or combination
of factors, may cause our actual results to differ materially
from those contained in any forward-looking statements.
The factors that could cause actual results to differ include,
but are not limited to, those risks that are outlined under the
Risk Factors section beginning on page 10 of
this prospectus.
You should not place undue reliance on any forward-looking
statement, each of which applies only as of the date of this
prospectus. Before you invest in our securities, you should be
aware that the occurrence of the events described in the section
entitled Risk Factors and elsewhere in this
prospectus could negatively affect our business, operating
results, financial condition and price of our securities. Except
as required by law, we undertake no obligation to update or
revise publicly any of the forward-looking statements after the
date of this prospectus to conform our statements to actual
results or changed expectations.
USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale
of
units that we are selling in this offering will be approximately
$ million, after deducting
the underwriting discounts and commissions and estimated
offering expenses payable by us, assuming an initial public
offering price of $ per unit. If
the underwriters exercise their over-allotment option in full,
we estimate that our net proceeds would increase to
approximately $ million.
Except as described below, the additional proceeds would be used
to fund our working capital needs and other general corporate
purposes.
Of the net proceeds from this offering, we expect to use
approximately:
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$ (or
$ if the underwriters exercise
their overallotment option in full) for the purchase of up to 25
existing or recently closed Planet Beach locations in the
U.S. from our franchisees and operate them as company
stores or resell them as franchises. As of the date of this
prospectus, we have no understandings, commitments or agreements
to acquire any stores.
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$ , plus accrued interest, to repay
our 8.25% promissory note due July 19, 2012. We issued this
note to Whitney National Bank to refinance an existing line of
credit and fund operations.
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$ , plus accrued interest, to repay
our 7% promissory note due April 10, 2012 to New Sunshine,
LLC. We issued this note when we converted $750,000 of accounts
payable we owed to New Sunshine, which is our primary supplier
of U-V equipment and U-V products.
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$ , plus accrued interest, to repay
our 7% promissory note due March 10, 2013 to JTL
Enterprises, Inc. We issued this note when we converted $22,350
of accounts payable we owed to JTL for purchases of equipment.
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$ , plus accrued interest, to repay
our 7% promissory note due March 10, 2013 to MT Industries,
Inc. We issued this note when we converted $92,500 of accounts
payable we owed to MT Industries for equipment purchases.
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$ , plus accrued interest, to repay
our 7% promissory note due January 1, 2013 to OL Products,
Inc. We issued this note when we converted $59,800 of accounts
payable we owed to OL for the purchase of body lotions.
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$50,000, plus accrued interest, to repay our 5% promissory note
to our president and chief executive officer. We borrowed these
funds to pay expenses of this offering. See Transactions
with Related Persons on page 62.
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$ for advertising and marketing
activities over a two year period designed to increase overall
franchise sales.
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$ to develop new skincare and
nutritional products to be offered at our locations.
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$ for capital improvements to our
corporate headquarters, which we use as our primary training
center for new and existing franchisees.
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$ for the development of new
franchise concepts.
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$375,00 to purchase certain intellectual property rights from
Planet Beach Brands, LLC, which is wholly owned by our
president, chief executive officer, chairman and principal
stockholder. See Transactions with Related Persons
on page 62 of this prospectus.
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We intend to use the remaining $
of the net proceeds from this offering for working capital and
general corporate purposes. The amounts actually spent for these
purposes may vary significantly and will depend on a number of
factors, including our operating costs and other factors
described under the section of this prospectus entitled
Risk Factors. While we have no present
understandings, commitments or agreements to enter into any
material acquisitions, we may use a portion of the net proceeds
to acquire property or equipment that complements our business.
Accordingly, management will retain broad discretion as to the
allocation of the net proceeds of this offering.
Pending the uses described above, we will invest the net
proceeds of this offering in short-term, interest-bearing,
investment-grade securities. We cannot predict whether the
proceeds will yield a favorable investment return.
DETERMINATION
OF OFFERING PRICE
Before this offering, there has been no trading market for the
units, our common stock or the warrants. The initial public
offering price of the units being offered by this prospectus
will be determined by negotiation by us and the representative
of the underwriters. The principal factors considered in
determining the initial public offering price include:
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the information set forth in this prospectus and otherwise
available to the representative;
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our history and prospects and the history of, and prospects for,
the industry in which we compete;
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our past and present financial performance and the
representatives assessment of our management;
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our prospects for future earnings and the present state of our
development;
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the general condition of the securities markets at the time of
this offering; and
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the recent market prices of, and the demand for, publicly traded
equity securities of generally comparable companies.
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As of March 18, 2010, there were approximately 44
stockholders of record of our common stock. There are no
outstanding options, warrants or other rights to acquire our
common stock other than:
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options to acquire 552,571 shares of our common stock under
our 2005 Stock Option Plan, all at an exercise price of $3.50
per share;
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shares subject to an option held by one of our vendors to
convert balances due under our note payable within
12 months of this offering at a conversion price equal to
the initial public offering price; and
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a number of shares issuable to one of our executive officers and
one employee in lieu of $13,632 of deferred cash compensation,
to be determined using the closing price of our common stock on
the NYSE Amex on the first day that the warrants and shares we
are offering begin trading separately, and to be issued on that
date.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 2009 on:
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an actual basis; and
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a pro forma as adjusted basis to give effect to the sale
of units in this offering at the
initial public offering price of $
per unit (after deducting estimated underwriting discounts and
commissions and estimated offering costs payable by us), the
application of the net proceeds of this offering as described
under Use of Proceeds, and the 1 for 3.5 reverse
stock split of our common stock that was effected when we
changed our state of incorporation to Delaware on March 18,
2010.
|
This table should be read in conjunction with Use of
Proceeds, Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
financial statements and the related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
Cash and cash equivalents
|
|
$
|
53,810
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
448,742
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
2,773,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
3,222,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.0001 par value per share:
10,000,000 shares authorized, none issued
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001 par value per share:
|
|
|
|
|
|
|
|
|
100,000,000 shares authorized, 13,428,139 shares
issued and 12,998,739 shares outstanding,
actual, shares
issued
and shares
outstanding, as adjusted
|
|
|
1,343
|
|
|
|
|
|
Additional paid-in capital
|
|
|
348,802
|
|
|
|
|
|
Retained earnings (deficit)
|
|
|
(1,480,120
|
)
|
|
|
|
|
Treasury stock, at cost
|
|
|
(175,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit):
|
|
|
(1,304,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization:
|
|
$
|
1,917,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The information in the table above excludes:
|
|
|
|
|
1,794,000 shares (512,571 shares, as adjusted) of our
common stock issuable upon exercise of options outstanding at
December 31, 2009 under our 2005 Stock Option Plan, all at
an exercise price of $3.50 per share;
|
|
|
|
shares subject to an option held by one of our vendors to
convert balances due under our note payable within
12 months of this offering at a conversion price equal to
the initial public offering price; and
|
|
|
|
a number of shares issuable to one of our executive officers and
one employee in lieu of $13,632 of deferred cash compensation,
to be determined using the closing price of our common stock on
the NYSE amex on the first day that the warrants and shares we
are offering begin trading separately, and to be issued on that
date.
|
23
DILUTION
Dilution represents the difference between the public offering
price per unit paid by investors in this offering, assuming no
value is attributed to the warrants included in the units, and
the pro forma net tangible book value per share of common stock
immediately after the offering. This calculation does not
reflect any dilution associated with the sale and exercise of
the warrants. Net tangible book value per share as of
December 31, 2009 represented the amount of our total
tangible assets less the amount of our total liabilities,
divided by the number of shares of common stock deemed to be
outstanding under U.S. generally accepted accounting
principles at December 31, 2009. Our net tangible book
value (unaudited) as of December 31, 2009 based on
3,713,925 shares of common stock outstanding was $(.351)
per share.
After giving effect to the sale
of shares
of common stock included in the units we are offering in this
prospectus, assuming an initial public offering price of
$ per unit, which is the midpoint
of the range listed on the cover page of this prospectus, and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net
tangible book value as of December 31, 2009 would have been
approximately $ , or
$ per common share. This
represents an immediate increase in net tangible book value to
our existing stockholders of $ per
share and an immediate dilution to new investors in this
offering of $ per share. The
following table illustrates this per share dilution in net
tangible book value to new investors, assuming no value is
attributed to the warrants included in the units:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per unit
|
|
|
|
|
|
$
|
|
|
Net tangible book value per share as of December 31, 2009
(unaudited)
|
|
$
|
(.351
|
)
|
|
|
|
|
Increase in net tangible book value per share attributable to
new investors
|
|
$
|
|
|
|
|
|
|
Pro forma net tangible book value per share after this offering
|
|
|
|
|
|
$
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
If the underwriters exercise their over-allotment option in full
in this offering, the pro forma net tangible book value would be
$ per share, the increase in pro
forma net tangible book value per share to existing stockholders
would be $ and the dilution per
share to new investors would be $
per share, in each case assuming an initial public offering
price of $ per unit.
The following table summarizes, as of December 31, 2009 on
a pro forma as adjusted basis, the total number of shares of
common stock purchased from us, the aggregate cash consideration
paid to us and the average price per share paid by existing
stockholders and by new investors in this offering before
deducting estimated offering expenses. The calculation below is
based on the offering price of $
per unit, before deducting underwriting discounts and
commissions and estimated offering expenses, and assumes no
value is attributed to the warrants included in the units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
Total Consideration
|
|
Average Price
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
|
per Share
|
|
|
|
|
%
|
|
$
|
|
%
|
|
$
|
|
Existing stockholders
|
|
|
3,713,925
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
New investors
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
If the over-allotment option is exercised in full, the number of
shares of common stock held by existing stockholders will be
reduced to approximately % of the
total number of shares of common stock outstanding after this
offering, and the number of shares of common stock held by new
investors will be , or
approximately % of the total number
of shares of common stock outstanding after this offering,
assuming no exercise of outstanding options or warrants.
24
DIVIDEND
POLICY
Our board of directors will make any future decisions regarding
dividends. We currently intend to retain and use any future
earnings for the development and expansion of our business and
do not anticipate paying any cash dividends in the foreseeable
future.
Our board of directors has complete discretion on whether to pay
dividends, subject to the approval of our stockholders. Even if
our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and
earnings, capital requirements and surplus, general financial
condition, contractual restrictions and other factors that the
board of directors may deem relevant. We paid $8,055 in
dividends in 2007. We did not pay dividends in 2008 or 2009.
The payment of dividends may be restricted by agreements
relating to our future indebtedness.
25
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We believe we are the largest, full-service automated day spa
franchisor in the United States. We grant franchises for stores
operating under the Planet Beach name. As of January 15,
2010, we had 345 franchises located in 38 U.S. states,
Canada, Ireland, South Africa and Australia. We also had at that
date 20 additional franchises under development, including
proposed locations in one new state as well as in Egypt, Saudi
Arabia and Kuwait. In addition, at that date we had candidates
interested in re-opening 16 previously closed locations,
including one in an additional state.
We establish most of our domestic franchises through
intermediaries whom we refer to as area
representatives. We grant development territories to area
representatives in exchange for a territory development fee.
These development territories are geographic regions within
which area representatives are entitled to market franchises and
are obligated to train, support and provide guidance to
franchisees in the territory. Our area representatives are
entitled to:
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|
|
|
|
50% of the initial franchise fee we earn from franchisees who
establish franchises in the area representatives
territory, if we sell the franchise as a result of the area
representatives efforts;
|
|
|
|
50% of the fee we earn when we transfer an existing franchise to
a new franchisee in the area representatives territory as
a result of the area representatives efforts;
|
|
|
|
50% of the fee we earn when a franchise broker facilitates a
sale or a transfer of a franchise in the area
representatives territory;
|
|
|
|
20% of the fee we earn when we sell a new franchise or transfer
an existing franchise in the area representatives
territory, but not as a result of his or her efforts or those of
a broker;
|
|
|
|
20% of the applicable fee we earn for sales of new franchises or
transfers of franchises outside the area representatives
territory, made as a result of the area representatives
efforts, if the territory has not been granted to another area
representative; and
|
|
|
|
40% of collected royalties that we receive from our franchisees
in their territories.
|
We establish most of our international franchises through
persons we refer to as master franchisors. Our
agreements with our master franchisors give them the right to
grant Planet Beach franchises in their assigned geographic
region. The master franchisors develop their own franchise
system in their areas. For example, the master franchisors are
required directly, or through area representatives that they
appoint, to sell, train, support and provide guidance to
franchisees in their areas. The master franchisors owe us a
master franchise fee when we appoint them as a master
franchisor, additional fees or royalties upon the sale of
franchises and a percentage of the revenues generated by
franchise outlets in the assigned area.
We require our franchisees and master franchisors to purchase
U-V and spa equipment, as well as certain U-V, skin care and
nutritional products, from us or from suppliers we designate.
All of the equipment, and approximately 53% of the products, are
sold under the Planet Beach private label. For our foreign
locations, we sell equipment directly to franchisees and pay a
portion of our profits to the master franchisor, if any, for the
applicable territory. We require our master franchisors to own
or control the first location in their territories, which we
call flagship locations. We sell equipment and
products to these flagship locations at a discount to our
domestic rates.
Currently, we sell our private label products at a profit to an
international distributor, who resells them to our foreign
franchisees. The distributor also sells other national branded
products to our foreign franchises, and pays us a royalty from
those sales. We share 60% of our royalties with the master
franchisor for the applicable territory. However, we expect that
in the future we will sell our private label products to our
master franchisors for resale to foreign franchisees. We would
earn a profit at the time of sale to the master franchisor and
would have no royalties on resales to the franchisees.
26
We have equipment and product suppliers who sell directly to our
franchisees and master franchisors, and we receive royalties on
these sales.
We generate revenues through:
|
|
|
|
|
Sales of spa equipment and products to our franchisees and
master franchisors;
|
|
|
|
Franchise fees, consisting of:
|
|
|
|
|
|
initial franchise fees;
|
|
|
|
area representative fees for domestic territories and master
franchise fees for international territories that are licensed
to our area representatives and master franchisors who sell and
profit from franchise outlets within the territory;
|
|
|
|
transfer fees payable by franchisees who desire to exit our
system upon the sale of their franchise to a new franchisee, to
offset administrative and retraining costs;
|
|
|
|
|
|
Royalties and related fees, including fees paid by our domestic
franchisees for our national advertising program, which we
recognize for accounting purposes to the extent we incur
national advertising expenses, and for brand development; and
|
|
|
|
Other fees, consisting of:
|
|
|
|
|
|
tenant placement and site design fees earned from securing a spa
location for our franchisees and coordinating the location
build-out;
|
|
|
|
company-operated spa revenues; and
|
|
|
|
convention revenues, which consist of registration fees and
vendor sponsorships for our annual convention for our
franchisees.
|
Our primary focus since 2005 has been to increase sales of
franchises through the development of our Contempo Spa concept.
All of our locations worldwide earned a total of
$79.2 million in spa sales for 2009, consisting of
$54.4 million in membership fees, $12.3 million in
fees for one-time services and $12.5 million in product
sales. For 2008, total worldwide spa revenues were
$82.9 million, consisting of $51.7 million in
membership fees, $16.9 million in one-time services and
$14.3 million in product sales.
Principal
Factors Affecting Our Financial Performance
We experienced challenging operating conditions in fiscal years
2007, 2008 and 2009. Fiscal year 2006 was our last profitable
year, when we earned $113,000 of net income. During that year,
we had a net increase of 66 operating locations, with 335 total
operating locations at December 31, 2006 compared with 269
operating locations at December 31, 2005, or an increase of
25%. Partially as a result of this growth in the number of our
operating locations, our equipment sales increased. The increase
in equipment sales was also attributable to the roll out in 2005
of our Contempo Spa format, which required franchisees to
purchase spa equipment for the first time. Credit and financing
was also readily available to franchisees throughout fiscal 2006.
To plan for the possibility that this high growth rate might
continue into fiscal 2007, we increased our staff by
11 employees during 2007 to support the growth in
locations. However, location growth in 2007 returned to the more
normal levels we experienced in fiscal 2005, resulting in a net
increase of 36 new locations in 2007. The decrease in location
openings resulted in a decrease in equipment sales from 2006
levels, but was offset by an increase in royalty revenue from
the greater total number of open locations. Ultimately, revenues
remained constant at approximately $26.4 million in both
fiscal 2006 and 2007. However, the increase in staff caused our
total compensation expense to increase to $6.6 million in
fiscal 2007, compared with $5.4 million in fiscal 2006, and
we incurred a net loss of $325,000 in 2007. We did not take
significant steps to correct this overstaffing until November
2008 when we began to make staff reductions in response to the
economic recession.
27
Our results for fiscal 2008 were driven by several factors.
First, equipment sales slowed as the number of new locations
opening during the year decreased, and as the number of our
locations that had not converted to our Contempo Spa format
decreased. Second, in the second half of 2008, our franchise
sales began to be affected by the global recession and
tightening of the credit market, and we had a net increase of
only 14 stores for the year, compared with the net 36 new
stores in 2007. Finally, we did not make meaningful reductions
in staff and compensation expense until the end of the 2008
fiscal year.
In fiscal year 2009, ongoing global economic challenges and
uncertainties had a significant impact on our business. For the
first time in our 14 year history, the number of our stores
decreased. We began the year with 385 spa locations worldwide,
and ended the year with 347 locations. This decrease of 38 spas,
or 9.9%, was the net result of 28 new or reopened locations and
66 closures. Although the U.S. economy has shown some signs
of improvement, management recognizes that the difficult
situations many of our franchisees and customers are
experiencing will not be resolved completely in 2010.
Management responded to this decrease in operating locations,
and the resulting decline in revenue, by reducing our operating
costs, mainly payroll. Managements goal was to rely less
on new location sales and openings by bringing recurring revenue
in line with recurring costs. Through attrition and staff
reductions, we reduced payroll expense by 37% in 2009 versus
2008. We consolidated job responsibilities and departments,
automated services, and cut personnel whose job duties were
largely intended for rapid location growth. On March 1,
2010, management further reduced personnel by six employees
in five departments with 2009 payroll and benefits expense
of approximately $544,000. However, we have maintained our
commitment to assist our franchisees with revenue growth, and
have avoided any reductions in our spa performance department,
which is responsible for increasing revenues at the franchisee
level.
The spas that closed in 2009 were largely underperforming
locations that were not able to sustain a membership base
necessary to weather the economic downturn. Spa and U-V services
and related product purchases are non-essential consumer
expenditures, and we believe the current recession has curtailed
consumer discretionary spending. However, our locations that we
classify as Contempo Spas (spas that include our key automated
spa services, as well as sunless-tanning services and U-V
therapy services) experienced average same store sales increases
of 4% in 2009 versus 2008. We believe our Contempo Spa customers
consider our membership program to be a good value because it
entitles them to a wide variety of spa services.
The lack of available credit to businesses has significantly
affected our existing and potential franchisees. Existing
franchisees who do not have operating lines of credit struggle
to manage cash flow, which increases their likelihood of
failure. Franchisees wanting to upgrade their businesses with
new equipment to attract and retain members are unable to do so
because equipment financing is also more limited than in the
past. Potential franchisees applying for
start-up
loans are still being denied credit by lenders, including the
Small Business Administration, or SBA.
In order to provide more cash to new franchisees entering our
system, we have focused significant efforts on assisting these
franchisees in pre-selling memberships months before opening,
which increases the likelihood of generating a positive cash
flow for the locations opening month. We have also worked
with our equipment manufacturers to reduce franchisee equipment
costs and offer trade-in programs that assist our franchisees in
upgrading their locations equipment. We have worked to
reduce the average
start-up
costs for a new location to below $300,000. We will continue to
assist franchisees in trying to obtain bank financing, including
SBA loans, by providing them with a model business plan and pro
forma financial statements that they use to determine their
financing and seek a lender.
We believe that our franchisees difficulty in obtaining
financing is one of the most challenging conditions we face in
fiscal year 2010. Deteriorating economic conditions have
negatively impacted our franchisees ability to obtain
credit, and therefore, our ability to sell additional
franchises. Moreover, this disruption in the credit markets has
negatively affected existing franchisees who are struggling to
manage cash, as well as credit terms extended by our suppliers.
28
In December 2009, the International Franchise Association, the
oldest and largest organization representing franchising
businesses with more than 1,250 franchise system members,
predicted a slow recovery for franchise businesses in 2010, with
marginal increases in the number of jobs, economic output and
the number of franchise establishments. The continuing credit
crisis will likely limit the level of growth that franchise
businesses will experience as compared with prior recoveries.
Despite this likely slow recovery, a PricewaterhouseCoopers
report predicts that the franchise sector that will experience
the most growth in 2010 is the personal services sector in which
we participate, with growth forecasted at 4.4%.
The United States personal and skin care services market has
grown significantly in recent years. According to Cognis, a
specialty chemical company that focuses on wellness, the skin
care services market maintained a strong growth rate with sales
rising by 6.8% from 2004 to 2006. We believe this growth will
result in increased sales of franchises and patronage of the
resulting and existing spas, positively affecting our overall
revenue.
Part of our growth strategy is to expand sales of franchises to
foreign markets. As of January 15, 2010, 22 of our
locations were outside the United States. While we continue to
grow domestically, we are seeking to establish a network of
sales avenues for our franchises in other developed countries
where we believe there is a strong demand for our products and
services. We have operating locations in Canada, Ireland, South
Africa, and Australia. We have sold a franchise in Egypt and
expect a location to open there in the Spring of 2010. We have
entered into master franchisor agreements but do not yet have
operating locations in Northern Ireland, the United Kingdom,
Kuwait, and Saudi Arabia. We believe we have found a niche
market in the Middle East where consumers desire more modesty
and privacy in spa services, especially for female customers. We
also plan to expand our brand to other countries in Europe, New
Zealand, South America, Central America, and Asia.
Critical
Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires our management to make assumptions, estimates and
judgments that affect the amounts reported in the financial
statements, including the related notes and disclosures of
commitments and contingencies, if any. We consider our critical
accounting policies to be those that require the more
significant judgments and estimates in the preparation of
financial statements, including the following:
Allowances
for Accounts and Notes Receivable
Accounts receivable consist primarily of amounts due for
franchise royalties and product sales, which are carried at
original invoice amount less an estimate made for doubtful
receivables based on a review of all outstanding amounts.
Management determines the allowance for doubtful accounts by
identifying overdue accounts and by reserving a percentage of
the accounts outstanding balance as uncollectible based on
historical experience with collections in general or based on
the accounts specific circumstance. Accounts receivable
are written off when deemed uncollectible. Recoveries of
accounts receivable previously written off are recorded when
received.
Notes receivable consist principally of area developer fees,
equipment vendor receivables, and spa purchase fees we finance.
The allowance for doubtful accounts is our best estimate of the
amount of credit losses in our existing notes. We determine the
allowance on an individual note basis upon review of any note
that has a payment past due for over 60 days. A note is
considered impaired if it is probable that we will not collect
all principal and interest contractually due. The impairment is
measured based on the present value of expected future cash
flows discounted at the notes effective interest rate.
We do not accrue interest when a note is considered impaired.
When ultimate collectability of the principal balance of the
impaired note is in doubt, all cash receipts on impaired notes
are applied to reduce the principal amount of such notes until
the principal has been recovered and are recognized as interest
income thereafter. Impairment losses are charged against the
allowance and increases in the allowance are charged to bad debt
expense. Notes are written off against the allowance when all
possible means of collection have been exhausted and the
potential for recovery is considered remote.
29
The notes have interest rates ranging from non-interest bearing
to 7.0 percent and will mature upon sale of related
franchises, or in accordance with scheduled maturities through
September 2016.
National
Advertising and Brand Development
We collect a national advertising and brand development royalty
from our franchisees. Franchises that were established before
April 1, 2008 are required to contribute 1% of gross sales
to our National Advertising Fund as a royalty for the
development and distribution of national marketing efforts for
the benefit of all franchisees within the Planet Beach system.
We carry forward national advertising royalties that are not
spent in the fiscal year collected to the following year, and
record them as a deposit on the consolidated balance sheet. At
December 31, 2009 and 2008, there were no carry forward
deposits. We recognize national advertising expenditures in the
consolidated statements of operations as incurred.
Beginning April 1, 2008, franchisees entering the system
must contribute 2% of gross sales for brand development. We have
no obligation to carry forward any unspent brand development
royalties for these franchisees to the following year. We
recognize brand development royalties in our consolidated
statements of income in full as we accrue them, along with the
brand development expenses.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
on plant and equipment is calculated using the straight line
method over the estimated useful lives of the related assets.
Maintenance and repairs are charged to expenses as incurred.
Improvements and renewals are capitalized and depreciated over
the remaining estimated useful life. When property, plant, and
equipment are sold or otherwise disposed of, the asset account
and related accumulated depreciation are relieved, and any gain
or loss is included in income.
The useful lives of property, plant, and equipment for purposes
of computing depreciation are:
|
|
|
|
|
Buildings and leasehold improvements
|
|
|
7 39 Years
|
|
Spa equipment
|
|
|
7 Years
|
|
Computer equipment
|
|
|
3 5 Years
|
|
Furniture, fixtures, and equipment
|
|
|
3 7 Years
|
|
Software
|
|
|
5 Years
|
|
Revenue
Recognition
We have entered into franchise agreements that grant franchisees
the right to operate individual Planet Beach Contempo Spas in
return for an initial franchise fee and ongoing development fees
(royalties). In addition, we have entered into area developer
agreements, including international master franchisor
agreements, under which we grant the right to sell individual
Planet Beach Contempo Spas in designated territories.
We recognize revenue from individual franchise sales when we
have substantially performed or satisfied all material services
or conditions relating to the sale.
Area developer fees, which include international master
franchise fees, are recognized as revenue on the cash basis
until 50% of the purchase price is collected; the uncollected
purchase price is deferred. All payments received for these area
agreements are non-refundable. We estimate that once 50% of the
purchase price has been collected, and no further significant
obligations remain, it is probable that the remaining area
development fee will be collectible. Therefore, we fully
recognize area development fees once 50% of the purchase price
is collected.
Most of these area agreements have promissory notes structured
requiring payment of at least 50% of the purchase price within
12 months of agreement execution. The remaining purchase
price will normally be collected over 3-6 years amortized
monthly with principal and interest payments.
30
All payments received for these area agreements are
non-refundable.
We accrue royalties based upon the contractual royalty rate,
currently 6% of total franchise revenue, as defined in the
respective franchise agreements. Royalties are recorded as
revenue when the related franchise revenue is reported to us.
Sales of spa equipment and products are recognized as revenue,
when the items are shipped, collection is probable, and no
further significant obligations remain.
Income
Tax
We account for income taxes under the liability method. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. We include any estimated interest and
penalties on tax related matters in income taxes payable.
Valuation allowances are established when necessary to reduce
net deferred income tax assets to the amount expected to be
realized.
Effective January 1, 2009, we recognize the effect of
income tax positions only if those positions are more likely
than not being sustained. Recognized income tax positions are
measured at the largest amount that is greater than 50% likely
of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs.
Prior to the adoption of ASC 740-10 Income Tax Uncertainties, we
recognized the effect of income tax positions only if such
positions were probable of being sustained. The effect of the
adoption of this standard was not material.
We record interest related to unrecognized tax benefits in
interest expense and penalties in selling, general, and
administrative expenses.
Stock-Based
Compensation
We account for our stock-based compensation using the modified
prospective adjustment method of measuring share-based payments.
Results
of Operations
The following tables set forth key components of our results of
operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(All amounts are in thousands of U.S. dollars)
|
|
|
Operating revenues
|
|
$
|
13,269
|
|
|
$
|
25,006
|
|
|
$
|
26,456
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,693
|
|
|
|
11,132
|
|
|
|
13,369
|
|
Operating expenses
|
|
|
3,950
|
|
|
|
5,630
|
|
|
|
4,633
|
|
Salaries and bonuses
|
|
|
4,280
|
|
|
|
6,791
|
|
|
|
6,634
|
|
Commissions
|
|
|
1,580
|
|
|
|
2,013
|
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
13,503
|
|
|
|
25,566
|
|
|
|
26,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(474
|
)
|
|
|
(198
|
)
|
|
|
(138
|
)
|
Income (loss) before provision for income taxes
|
|
|
(708
|
)
|
|
|
(758
|
)
|
|
|
(330
|
)
|
Provision (benefit) for income tax
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(708
|
)
|
|
$
|
(758
|
)
|
|
$
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(All amounts are in thousands of U.S. dollars)
|
|
Operating revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
28
|
%
|
|
|
45
|
%
|
|
|
51
|
%
|
Operating expenses
|
|
|
30
|
%
|
|
|
23
|
%
|
|
|
18
|
%
|
Salaries and bonuses
|
|
|
32
|
%
|
|
|
27
|
%
|
|
|
25
|
%
|
Commissions
|
|
|
12
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
Total operating expenses
|
|
|
102
|
%
|
|
|
102
|
%
|
|
|
101
|
%
|
Total other income (expense)
|
|
|
(4
|
)%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
Income (loss) before provision for income taxes
|
|
|
(5
|
)%
|
|
|
(3
|
)%
|
|
|
(1
|
)%
|
Provision (benefit) for income tax
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Net income (loss)
|
|
|
(5
|
)%
|
|
|
(3
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(All amounts are in thousands of U.S. dollars)
|
|
|
Sales of spa equipment and products
|
|
$
|
4,920
|
|
|
$
|
14,706
|
|
|
$
|
17,586
|
|
Franchise fees
|
|
|
1,257
|
|
|
|
3,067
|
|
|
|
2,745
|
|
Royalties and related fees
|
|
|
6,883
|
|
|
|
6,833
|
|
|
|
5,585
|
|
Other
|
|
|
209
|
|
|
|
400
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totaling Operating Revenues
|
|
$
|
13,269
|
|
|
$
|
25,006
|
|
|
$
|
26,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Years Ended December 31, 2009 and 2008
Operating
Revenues
Our total operating revenues in fiscal 2009 were
$13.3 million, which is a decrease of $11.7 million,
or 47%, from total operating revenues in fiscal 2008, during
which we had revenues of $25.0 million. The decline in
revenue is attributable to decreases in spa equipment and
product sales, initial franchise fees, area developer fees, and
national advertising fees recognized, offset by an increase in
royalties. Other revenues remained steady year over year.
Spa equipment sales are driven by new location openings and by
purchases of add-on or upgraded equipment by existing
franchisees. We had 28 new locations open in fiscal 2009,
compared with 54 for fiscal 2008, or a decrease of 48%. Our
equipment sales were $2.6 million and $9.3 million,
respectively, for fiscal 2009 versus 2008. The decline in new
locations accounted for approximately $5.6 million of this
$6.7 million or 72% decrease, with the remaining
$1.1 million of the decline attributable to a decrease in
sales of additional equipment to existing franchisees. New
location equipment sales accounted for $1.5 million and
$7.2 million in 2009 and 2008, respectively. Add-on
equipment sales accounted for $1.1 million and
$2.1 million in 2009 and 2008, respectively. The decrease
in domestic franchise sales in 2008 versus 2007 of 35% resulted
in the 48% decline in the number of new location openings in
2009 versus 2008. Franchise locations typically take from six to
twelve months to open, so equipment sales for new openings lag
and typically cross over fiscal years. In addition, there were
further delays in the opening of locations in 2009 due to the
lack of available equipment financing. Add-on equipment sales
were also negatively affected by the lack of available credit
for small business throughout 2009.
Product sales are driven by the number of our open locations
purchasing directly from our warehouse. We have several product
vendors who sell directly to our franchise locations. The vendor
remits us a percentage of those sales and we record those
amounts as royalties. Product sales in fiscal 2009 were
$2.3 million, which is a decrease of $3.1 million, or
57%, from product sales in fiscal 2008 of $5.4 million. The
decline in product
32
revenue is attributable to two factors. First, in the first
quarter of fiscal 2009, our primary supplier of U-V lotions, New
Sunshine LLC, began shipping products directly to franchisees.
With this shift, we began recording a royalty on these sales.
Total direct sales to our franchises from New Sunshine, LLC were
$1.4 million in 2009, and we recorded $403,000 as royalty
and related fees in 2009 related to these sales. Second, the
average number of franchise locations opened during the year
decreased from 378 in fiscal 2008 to 366 in fiscal 2009. At year
end 2009 and 2008, we had 347 and 385 locations open,
respectively, a net decrease of 38 locations. This decrease in
average locations opened in 2009 versus 2008, and locations
purchasing and selling less expensive products in 2009,
accounted for the remaining $1.7 million reduction in
product sales.
Franchise fees, totaled $1.3 million, for fiscal year 2009,
a decrease of $1.8 million, or 60%, from fiscal year 2008,
during which we had franchise fees of $3.0 million. Of this
decrease, $0.7 million resulted from decreased
international master franchisor fees and $1.1 million
resulted from lower initial franchise and area representative
fees. While international master franchisor fees fell in 2009,
we added three new countries and one new territory. However, the
countries and territory added were at a lower fee than in 2008
due to the size of the population in each. Initial franchise
fees and area representative fees continued to decline in 2009
in response to the on-going recession and lack of credit
available to small businesses.
Royalties and related fees mainly include the royalty of 6% of
franchisees total revenue which we collect on a monthly
basis, but also include technology, education and nutrition
fees, along with royalties received from equipment, product and
construction vendors who sell directly to our franchisees. Also
included are fees paid for our national advertising and brand
development programs. At December 31, 2009, we had 16
locations that were operated under an older version of our
franchise agreement or other arrangements that require them to
pay us a flat monthly royalty fee ranging from $250 to $975 per
month, or no fee as described under Transactions with
Related Persons. Royalties and related fees for fiscal
2009 and 2008 were consistent at $6.8 million. Royalties
earned from vendors selling products to or servicing our
franchisees totaled $0.9 million and $0.6 million in
2009 and 2008, respectively, an increase of $0.3 million.
This increase was largely the result of shifting the fulfillment
responsibilities for our U-V products to New Sunshine, LLC in
the first quarter of 2009. New value-added services, such as
access to our on-line service, NutritionSpa.com, and nutrition
products in 2009 increased royalties by $0.1 million versus
2008. The decrease in average locations opened in 2009 versus
2008 did not have a significant effect on the franchisee
royalties we earned as we experienced a 4% increase in same
store sales for our Contempo Spa locations.
For franchises established before April 1, 2008, national
advertising fees are billed at a rate of 1% of total franchisee
gross sales. We recognize these fees to the extent we incur
expenses for national advertising. We defer any remaining fees
to the subsequent year. Beginning April 1, 2008,
franchisees entering the system must contribute 2% of gross
sales for brand development. We have no obligation to carry
forward any unspent brand development fees for these franchisees
to the following year. These brand development fees totaled
approximately $110,000 and $10,000 in 2009 and 2008,
respectively. National advertising and brand development fees
are largely spent on our annual, nationally televised
Ms. Planet Beach Spokesmodel Search, which has become the
primary method of increasing brand awareness domestically and
internationally for our franchise locations. National
advertising expenses and recognized revenue totaled
$0.7 million and $1.1 million, respectively, in fiscal
2009 and 2008. This $0.4 million decrease was due to
decreased costs incurred for the competitions planning,
production and television syndication in 2009 compared with 2008.
Total
Operating Expenses
Our total operating expenses for fiscal 2009 were
$13.5 million, which is $12.0 million less than in
fiscal 2008, during which we had operating expenses of
$25.5 million, a decrease of 47%. Decreases occurred in all
categories of expenses, including cost of goods sold, operating
expenses, salaries and bonuses, and commissions.
33
Cost of
Goods Sold
Our cost of goods sold in fiscal 2009 amounted to
$3.7 million, which is $7.4 million, or 67%, less than
in fiscal 2008, during which our cost of goods sold was
$11.1 million. The decrease in our total cost of goods sold
resulted from a decrease in sales of spa equipment and products
and from the change in our relationship with certain suppliers.
In the first quarter of 2009, certain suppliers shipped and
billed our franchisees directly for products and began paying us
royalties based on these sales. Combined sales of spa equipment
and products were $4.9 million and $14.7 million in
2009 and 2008, respectively, a decrease of $9.8 million or
67%. As noted above, sales of spa equipment and products
decreased sharply in 2009 from 2008 as the result of fewer new
open locations, a decrease in the average number of open
locations, the lack of available credit for small businesses to
expand, and the tendency for franchisees to purchase and sell
less expensive products in 2009.
Operating
Expenses
Our operating expenses for fiscal 2009 were $3.9 million,
which is $1.7 million less than in fiscal 2008, during
which we had operating expenses of $5.6 million, a decrease
of 30%. Decreases in 2009 occurred in several categories
including: a decrease of $0.1 million in consulting and
contract labor; a decrease of $0.1 million in credit card
fees; a decrease of $0.1 million in legal expenses; a
decline in freight of $0.1 million; the elimination of
$0.1 million in travel-related expenses as a reward for our
top ten performing franchisees; and a $0.3 million decline
in advertising and marketing costs; a decrease in travel costs
of $0.3 million; and decreased costs for our annual
convention of $0.1; and a decrease in national advertising and
brand development expenses of $0.4 million; offset by
increases in lawsuit settlement cost of $0.4 million.
Decreases in these expenses were necessary to offset declining
revenues and cash flow. In addition, franchise lawsuits
increased as troubled franchisees filed suit seeking damages for
alleged breaches of their contracts. In all cases, management
agreed to settlements, some through mediation, to avoid lengthy
and costly legal battles.
Our national advertising and brand development expenses in
fiscal 2009 were $0.7 million, a decrease of
$0.4 million from fiscal 2008, during which we had expenses
of $1.1 million. These expenses are largely for the annual,
nationally televised Ms. Planet Beach Spokesmodel Search,
which has become the primary method of increasing brand
awareness domestically and internationally for our franchise
locations. The $0.4 million decrease was due to decreased
costs incurred for the competitions planning, production
and television syndication in 2009 compared with 2008. The 2009
competition will air during 2010.
Salaries
and Bonuses
Our salaries and bonuses in fiscal 2009 were $4.3 million,
a decrease of $2.5 million, or 37%, from fiscal 2008,
during which we had salaries and bonuses of $6.8 million.
The average number of employees decreased from 73 in fiscal 2008
to 50 in fiscal year 2009, a decrease of 23 employees or
32%. We had a total of 65 and 47 employees on staff at the
end of 2008 and 2009, respectively. In response to declining
revenues and a slowdown in the number of franchise locations
sold, opening and opened, we began to reduce our staff and
consolidate departmental operations in the middle of 2008. We
had layoffs in the third and fourth quarters of 2008 and the
first quarter of 2009 to adjust our staffing to an efficient
level based on the current economic climate. In addition to
staff reductions and department consolidation, we also
restructured our internal sales commissions, reduced our base
pay, suspended matching contributions to our 401(k) plan, and
allocated more of the cost of our health insurance plan to our
employees.
Commissions
Commissions were $1.6 million and $2.0 million in
fiscal 2009 and 2008, respectively, a decrease of
$0.4 million, or 20%. The monthly, recurring fee paid to
area representatives for their 40% of collected royalties
totaled $1.2 million and $1.3 million in fiscal 2009
and 2008, respectively, a decrease of $0.1 million, which
reflects the total decrease in locations opened in 2009 from
2008. The remaining $0.3 million decrease is attributable
to lower commissions paid to external brokers and area
representatives pursuant to franchise sales or transfers, which
reflects the decline in franchise sales in 2009 from 2008.
34
Other
Income (Expense)
Other income (expense) includes interest and other income,
interest expense paid on long-term debt, and realized gains
(losses). Total other income (expense) was ($0.5) million
and ($0.2) million in fiscal years 2009 and 2008,
respectively. The increase is the result of realized losses in
2009 totaling ($0.3) associated with the liquidation of our
available-for-sale securities in 2009.
Income
Taxes
The company recorded no provision for income tax for fiscal 2009
and 2008 due to net loss incurred in both years.
Fiscal
Years Ended December 31, 2008 and 2007
Operating
Revenues
Our total operating revenues in fiscal 2008 were
$25.0 million, which is a decrease of $1.5 million, or
5.7%, from total operating revenues in fiscal 2007, during which
we had revenues of $26.5 million. The decline in revenue is
attributable to a decrease in equipment sales, offset by an
increase in initial franchise fees, area representative and
master franchisor territory fees, royalties, and national
advertising and brand development fees recognized.
Equipment sales are driven by new location openings and by
purchases of additional or upgraded equipment by existing
franchisees. We had 54 new locations open in fiscal 2008, versus
58 for fiscal 2007, or a decrease of 7%. Our equipment sales
were $9.3 million and $12.0 million, respectively, for
fiscal 2008 versus 2007. The decline in new locations opening,
and existing locations purchasing fewer U-V light beds accounted
for approximately $2.3 million of this $2.7 million
decrease, as we continued to promote our spa concept. Purchases
of U-V light beds in fiscal 2008 year totaled $3.8 million,
a decrease of $2.3 million from fiscal year 2007, when we
had U-V light bed purchases totaling $6.1 million. The
remaining $0.4 million of the decline was attributable to a
decrease in sales of additional equipment to existing franchises
struggling with the credit crisis. With the inception of our
Contempo Spa concept in 2005, add-on equipment sales increased
in fiscal years 2006 and 2007 as existing locations converted to
the Contempo Spa format and purchased hydration stations, aqua
massage, facial, and sunless tanning equipment. However,
beginning in 2008, these add-on sales started to taper off as
the number of locations that had not converted to the Contempo
Spa format decreased.
Franchise fees for fiscal 2008 totaled $3.1 million, which
is an increase of $0.4 million, or 14.8%, from fiscal 2007,
during which we had franchise fees of $2.7 million. Fiscal
2008 was our first full year of international expansion, which
provided an additional $1.0 million in master franchise
sales versus fiscal 2007. Initial franchise fees declined
$0.7 million as domestic franchise sales slowed in response
to the growing national recession. For 2008, international
master franchisor sales were $1.1 million, versus
$0.1 million for 2007. Domestic location and territory
sales totaled $1.8 million for 2008, versus
$2.3 million for 2007.
Royalties and related fees mainly include the royalty of 6% of
franchisees total revenue which we collect on a monthly
basis, but also include technology, education and nutrition
fees, along with royalties received from equipment, product and
construction vendors who sell directly to our franchisees. Also
included are fees paid for our national advertising and brand
development programs. At December 31, 2008, we had 15
locations that were operated under an older version of our
franchise agreement or other arrangements that require them to
pay us a flat monthly royalty fee ranging from $250 to $975 per
month, or no fee as described under Transactions with
Related Persons. Royalties and related fees for fiscal
2008 totaled $6.8 million, which is an increase of
$1.2 million or 21.4% from fiscal year 2007, during which
we had royalties of $5.6 million. Our average open
locations for fiscal 2008 totaled 378, versus 353 for fiscal
year 2007. This increase in average locations of 25, or 7%,
accounted for some of the increase in royalties.
For franchises established before April 1, 2008, national
advertising fees are billed at a rate of 1% of total franchisee
gross sales. We recognize these fees to the extent we incur
expenses for national advertising. We defer any remaining fees
to the subsequent year. Beginning April 1, 2008,
franchisees entering the system
35
must contribute 2% of gross sales for brand development. We have
no obligation to carry forward any unspent brand development
fees for these franchisees to the following year. These brand
development fees totaled approximately $10,000 in 2008. National
advertising expenses and recognized revenue totaled
$1.1 million and $0.6 million, respectively, in fiscal
2008 and 2007. This $0.5 million increase was due largely
to costs incurred to record and distribute via television
syndication the Ms. Planet Beach Spokesmodel Search. The
2008 competition, which aired in 2009, aired in markets that
represented 64.7% of U.S. households. This competition has
become the primary method of increasing brand awareness
domestically and internationally for our franchise locations.
Total
Operating Expenses
Our total operating expenses for fiscal 2008 amounted to
$25.6 million, which is $1.0 million less than in
fiscal 2007, during which we had operating expenses of
$26.6 million. As described below, the decrease was mainly
due to declines in cost of goods sold, offset by an increase in
national advertising and brand development expenses. All other
expense categories remained steady.
Cost of
Goods Sold
Our cost of goods sold in fiscal 2008 amounted to
$11.1 million, which is $2.2 million or 16.5% less
than in fiscal 2007, during which our cost of goods sold was
$13.3 million. The decrease in our total cost of goods sold
resulted from a decrease in cost of goods sold for spa
equipment. Sales of spa equipment declined $2.7 million, or
22.5%, from $12.0 million in fiscal 2007 to
$9.3 million in fiscal 2008 due to lower add-on equipment
sales and fewer new location openings.
Operating
Expenses
Our operating expenses in fiscal 2008 amounted to
$5.6 million, which is $1.0 million or 21.7% greater
than in fiscal year 2007, during which our operating expenses
were $4.6 million. An increase in bad debt expense of
$0.4 million year over year accounted for some of this
increase. In addition our national advertising and brand
development expenses in fiscal 2008 amounted to
$1.1 million, an increase of $0.5 million over fiscal
2007, during which we had expenses of $0.6 million. This
$0.5 million increase was due largely to costs incurred to
record and distribute via television syndication the
Ms. Planet Beach Spokesmodel Search. The 2008 competition
aired in 2009 in markets that represented 64.7% of
U.S. households. This competition has become a key method
of increasing brand awareness domestically and internationally
for our franchise locations.
Salaries
and Bonuses
Our salaries and bonuses were consistent at $6.8 million
and $6.6 million for fiscal years 2008 and 2007,
respectively. Our average number of employees remained stable at
73 positions for each year, but base salaries increased
$0.2 million, or 6%, from fiscal 2007 to fiscal 2008, due
to an increase in management personnel needed to staff our
growth plan. Employee health plan costs also increased
$0.1 million in fiscal 2008, or 5%, keeping pace with the
national average. These increases were offset by
$0.2 million decrease in internal sales commissions and
profit bonuses due to a decline in product and equipment sales
and franchise sales in 2008 compared to 2007.
Commissions
Commission expenses were consistent at $2.0 million in both
fiscal 2008 and 2007. The monthly, recurring fee paid to area
representatives for their 40% of collected royalties increased
by $0.1 million due to an overall increase in company
royalty revenue, offset by a $0.1 million decrease in
external broker and area representative commissions paid on new
franchise sales. Increased royalties of $0.5 million in
2008 from the national advertising fees recognized do not affect
commission expense.
36
Other
Income (Expense)
Other income (expense) includes interest and other income,
interest expense paid on long-term debt and realized gains
(losses). Total other income (expense) was ($0.2) million
and ($0.1) million, respectively, for the 2008 and 2007
fiscal years. The increase was the result of increased interest
expenses associated with an increase in interest-bearing, long
term debt.
Income
Taxes
The company recorded no provision for income tax for fiscal
2008; a small benefit was recorded in 2007.
Liquidity
and Capital Resources
As of December 31, 2009, we had cash and cash equivalents
of $53,810. The following table provides detailed information
about our net cash flow for all financial statement periods
presented in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(All amounts are in thousands
|
|
|
of U.S. dollars)
|
|
Components of Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
66
|
|
|
|
265
|
|
|
|
58
|
|
Net cash provided by (used in) investing activities
|
|
|
140
|
|
|
|
(858
|
)
|
|
|
(170
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(212
|
)
|
|
|
(256
|
)
|
|
|
379
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(6
|
)
|
|
|
(849
|
)
|
|
|
267
|
|
Operating
Activities
Net cash provided by operating activities was approximately
$66,000 and $265,000, respectively, for the fiscal years ended
December 31, 2009 and December 31, 2008, reflecting a
decrease of $199,000. Cash flow from operating activities
decreased period over period due to lower levels of inventory as
a result of our new product fulfillment agreement with New
Sunshine, LLC and a significant decrease in accounts payable,
offset by a decrease in national advertising expense, a decrease
in accounts receivable, and an increase in cash from customer
deposits.
We spent less on the Ms. Planet Beach Spokesmodel Search in
2009 than 2008 for production and television syndication, which
resulted in the expenditure of fewer national advertising
deposits. Better management of accounts receivable in 2009
resulted in a minor increase of $80,000 in accounts receivable
compared with an increase of $319,000 in 2008, thus more cash
was available from revenues in 2009 than 2008. Customer deposits
on hand at December 31, 2008 compared with
December 31, 2007 were lower due to lower add-on and new
equipment sales at our annual convention, held every October.
Thus, cash from customer deposits we remitted to equipment
vendors were lower by $1.1 million from fiscal year 2009
compared with fiscal year 2008. Fewer new locations and a lack
of available financing contributed to a decline in purchases by
existing franchisees of additional pieces of equipment during
the last quarter of fiscal 2008.
Net cash provided by operating activities was approximately
$265,000 and $58,000, respectively, for fiscal years 2008 and
2007, reflecting an increase of $207,000.
Cash flow from operating activities increased period over period
due to lower levels of inventory and a decrease in accounts
payable, offset by a decrease in national advertising deposits
and a decrease in customer deposits.
A large inventory balance on hand at December 31, 2007 of
$1.3 million resulted in a source of cash from inventory
balance reductions for fiscal year 2008 compared with fiscal
year 2007. We delayed payments on accounts payable to offset
other operating shortfalls, which caused an increase of
$1.4 million in accounts payable for fiscal year 2008.
37
Negative effects on cash flow included increased spending for
production and television syndication costs of the
Ms. Planet Beach Spokesmodel Search in 2008 from 2007,
resulting in a drawdown of national advertising deposits in
fiscal 2008. We received substantial customer deposits in 2007,
which were used to purchase equipment for sales in 2008.
Investing
Activities
Our main uses of cash for investing activities are for purchases
of fixed assets, purchases of investments, and notes receivable
from franchisees, equipment vendors, domestic area
representatives, and international master franchisors.
Net cash provided by (used in) investing activities was
approximately $140,000 and ($858,000) for the years ended
December 31, 2009 and December 31, 2008, respectively,
an increase of approximately $998,000. Purchases of fixed assets
were consistent year over year. We liquidated all our
available-for-sale securities during the first quarter of fiscal
2009 to forego any further market loss and to improve our cash
position. For the year ended December 31, 2009, notes
receivable decreased by a net $17,000 due to payments for
international and domestic territories, compared with a net
increase of approximately $717,000 in 2008.
Net cash used in investing activities was approximately $858,000
and $170,000 for the years ended December 31, 2008 and
2007, respectively, an increase of $687,000. For the year ended
December 31, 2008, notes receivable increased by $717,000,
which included adding notes for domestic territories totaling
$312,000 and adding notes for international territories totaling
$427,000, net of initial fees collected for each territory. Cash
paid for fixed assets was higher in fiscal year 2007 than in
fiscal 2008 due to increased building improvements costs.
Financing
Activities
Cash flow from financing activities mainly includes our net
borrowings in line of credit, and proceeds and payments on
long-term debt. Our debt ratio (the ratio of total long-term
debt to total assets) was 65% and 52% at December 31, 2009
and December 31, 2008, respectively.
Net cash used in financing activities was approximately $212,000
and $256,000 for the years ended December 31, 2009 and
December 31, 2008, respectively, a decrease of $44,000. For
the year ended December 31, 2009, we liquidated all
available-for-sale securities held by our investment broker,
which secured our line of credit, and in turn paid off our
outstanding line of credit of $192,000 in full. During the same
period, we borrowed a total of $313,000 against credit
facilities from two of our equipment and product vendors. For
the same period in 2008, we borrowed a total of $59,000 against
these vendor credit facilities. Principal payments on long term
debt were $384,000 for the year ended December 31, 2009.
For the same period in 2008, principal payments on long term
debt were $301,000. The increase is attributable to payments on
the credit facilities from our vendors, all established in late
2008 as described below.
Net cash (used in) provided by financing activities was
approximately ($256,000) and $379,000 for fiscal years 2008 and
2007, respectively, a decrease of $635,000. For fiscal 2008, we
had payments on long term debt totaling $301,000. For the same
period in 2007, we had debt payments of $134,000. For fiscal
2007, we had proceeds from long term debt of $499,000, which
included a borrowing of $408,000 on our Whitney National Bank
note described below.
We have incurred losses of approximately $708,000, $758,000 and
$325,000 for our years ended December 31, 2009, 2008 and
2007, respectively. The losses have occurred due to the global
economic downturn that began in 2007. We and our franchisees
have struggled to obtain credit on reasonable terms or at all.
We are confident that we can continue to operate in a manner to
generate net cash from operating activities by reducing
operating and salary costs, improving operating profitability,
controlling inventory levels, working with vendors and other
creditors to accept more favorable payment terms, and through
seeking additional capital for our operations. As described
above, we implemented many operating expense reductions in
fiscal year 2009 and will continue to do so into 2010.
38
Over the past 18 months, we have reduced payroll expense to
counter the decline in revenues and to adjust staff levels for
current locations and activity. We reduced payroll expense in
fiscal 2009 by 37% or $2.5 million as compared to fiscal
year 2008. In the first quarter of 2010, we again reduced
personnel by six employees in five departments with 2009 annual
payroll and benefits of $544,000, avoiding reductions in spa
performance departments, which assist franchisees with growth.
We have incurred higher than normal bad debt expense for fiscal
years 2009 and 2008 of $554,000 and $495,000, respectively, due
to location closures and struggling franchises. However, we
achieved same store sales growth of 4% in 2009 as compared to
2008 for our Contempo Spa locations. Also, we experienced an
increase in franchise litigation in 2009 with lawsuits filed by
troubled franchisees seeking damages for alleged breaches of
their contracts. In fiscal 2009, we recorded as operating
expense $523,000 in settlement expenses and $189,000 in external
legal fees as a result of the franchise lawsuits. Management
does not expect this level of litigation in 2010.
Through this credit crisis and recession, many of our vendors
have been able to assist us with cash flow by establishing
payment plans and/or deferring payments. We have a recurring
revenue stream from royalties and related fees totaling
$6.8 million in fiscal year 2009 from our 345 locations, as
of January 15, 2010. We have taken measures to become less
dependent on spa equipment sales and franchise fees through
operating and payroll expense reductions.
Loan
Facilities
The following table details our long-term debt outstanding as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Maturity
|
|
|
Lender
|
|
Amount
|
|
Date
|
|
Interest Rate
|
|
Capital One Bank
|
|
$
|
840,000
|
|
|
March 2027
|
|
|
6.54
|
%
|
SBA
|
|
|
591,000
|
|
|
June 2027
|
|
|
5.79
|
%
|
Whitney National Bank
|
|
|
619,000
|
|
|
July 2012
|
|
|
8.25
|
%
|
Former Stockholder
|
|
|
46,000
|
|
|
November 2011
|
|
|
0.00
|
%
|
New Sunshine LLC
|
|
|
516,000
|
|
|
April 2012
|
|
|
7.00
|
%
|
JTL Enterprises, Inc.
|
|
|
42,000
|
|
|
March 2013
|
|
|
7.00
|
%
|
MT Industries, Inc.
|
|
|
174,000
|
|
|
March 2013
|
|
|
7.00
|
%
|
OL Products, Inc.
|
|
|
234,000
|
|
|
January 2013
|
|
|
7.00
|
%
|
Leaf Funding, Inc.
|
|
|
94,000
|
|
|
July 2012
|
|
|
3.47
|
%
|
Irvine Company LLC
|
|
|
17,000
|
|
|
August 2011
|
|
|
7.00
|
%
|
Stephen P. Smith
|
|
|
50,000
|
|
|
June 2010
|
|
|
5.00
|
%
|
The Capital One loan for $840,000 and the SBA loan for $591,000
were used to purchase and improve our principal place of
business; both loans are secured by the buildings and building
improvements.
The Whitney National Bank loan was used to refinance an existing
line of credit balance and fund operations, and is secured by
accounts receivable and inventory.
The loan from the former stockholder was used to buy back the
individuals shares of our common stock.
The New Sunshine, LLC loan was used to refinance accounts
payable and is secured by 85,714 shares of our common stock
owned and pledged by Stephen Smith, our Chairman and Chief
Executive Officer. New Sunshine, LLC is the parent company of
ETS, Inc. and Australian Gold, our exclusive suppliers of all
U-V equipment and parts, and national branded U-V lotions, used
or sold in our spas. On February 29, 2008, we converted
$750,000 of accounts payable we owed to New Sunshine, LLC for
U-V product purchases into a four-year note payable.
JTL Enterprises is one of our suppliers of water massage
machines. On September 30, 2008, we converted $22,350 of
accounts payable we owed to JTL for equipment purchases into a
four-year, unsecured note payable. The note provided additional
borrowing capacity of up to $27,650. Upon execution of the note,
39
we awarded JTL 879 shares of our common stock and the
option to convert the balance owed into additional shares of
common stock within 12 months. This option expired on
September 30, 2009.
MT Industries, Inc. is a supplier of U-V equipment and related
products. On October 3, 2008, we converted $92,483 of
accounts payable we owed to MT Industries for equipment
purchases into a four-year, unsecured note payable. The note
provided additional borrowing capacity of up to $157,517. Upon
execution of the note, we awarded MT Industries
4,396 shares of common stock and the option to convert the
balance owed into additional shares of common stock within
12 months. This option to convert expired October 3,
2009. On September 17, 2009, we terminated any additional
borrowing and capped the note at $173,787, with a
37-month
term.
OL Products, Inc. is one of our suppliers of body lotions. On
October 31, 2008, we converted $59,775 of accounts payable
we owed to OL for body lotions into a four-year, unsecured note
payable. The note provided additional borrowing capacity of up
to $240,225. Upon execution of the note, we awarded OL
5,275 shares of common stock and the option to convert any
outstanding balance owed into additional shares of common stock
within the first 12 months after our initial public
offering at the initial public offering stock price. This option
to convert remains outstanding.
In October 2009, we took control of our franchise location in
Irvine, CA and now operate it as a company store. In conjunction
with that transaction, we assumed the equipment financing note
from Leaf Funding, Inc., for approximately $94,000 outstanding
at the time. In addition, we assumed the location lease with
Irvine Company LLC and established a promissory note for half of
the overdue rent at that time totaling $17,000. We have recently
extended the lease term through August 2011.
On November 18, 2009, our President, Chief Executive
Officer and Chairman, Stephen Smith, loaned us $50,000 for the
payment of expenses related to this offering. The note is to be
repaid with 5% interest for a total repayment amount of $52,500
upon completion of this offering.
On February 26, 2010, we borrowed $250,000 under our June
2003 agreement with ETS, LLC, for the development and
construction of a prototype salon. We intend to use these funds
for renovation and expansion of our company store in Irvine, CA,
which will showcase ETSs U-V and sunless tanning
equipment, along with our spa equipment. The Prototype Salon
Note we executed is due and payable on February 26, 2011.
The note bears interest at an annual rate equal to the prime
rate most recently quoted by J.P. Morgan Chase prior to the
issue date, plus 1%. If we sell the prototype salon before the
due date of the note, the amount borrowed plus accrued interest
will become due upon the sale.
Obligations
under Material Contracts
In October 2002, we entered into a product purchase agreement
with ETS for the purchase of U-V equipment and supplies, whereby
we agreed to purchase exclusively from ETS all U-V equipment and
all lamps, parts, accessories, lotions, skin and hair care
products, cleaning equipment and other U-V related products used
or sold in spas owned, operated, or franchised by us. In
addition, we agreed to designate ETS as our exclusive supplier
of U-V equipment and supplies in existing and future franchise
agreements. This purchase agreement is in effect through 2017.
Under this arrangement, we purchased approximately $2,981,000,
$4,860,000 and $7,219,000 of our spa equipment and products from
ETS in 2009, 2008, and 2007, respectively. In 2009 ETS began
shipping products directly to our franchisees and remits to us a
royalty on these sales based on the profit margin we were
earning on the sales previously. As part of the agreement, cash
proceeds from the profits we earned were to be used to repay an
outstanding accounts payable balance with the vendor. As of
December 31, 2009 and 2008, the amounts of accounts payable
due to the vendor subject to the agreement were approximately
$118,000 and $836,000, respectively.
Our contracts with our franchisees, area representatives and
master franchisors are described under Our Business.
At December 31, 2009, we had 23 area representatives for 27
territories, covering approximately 64% of our total domestic
franchise locations and approximately 10% of the total
U.S. geographic land area. Each territory is governed by a
separate agreement. Of the 27 agreements, four will expire in
five years or less, 21
40
will expire in six to ten years, and two will expire in 11 to
15 years. At December 31, 2009, we had eight master
franchisor agreements in place, one of which will expire in
2020, five will expire in 2023, and two will expire in 2024.
Seasonality
Like most other retail businesses, our business is seasonal.
Traditionally, spa patronage and sales of our products and
services are higher beginning in the early Spring through late
Summer. Because of the seasonality of our business, results for
any quarter are not necessarily indicative of the results that
we may achieve for the full year. In addition, fluctuations in
sales and operating income in any fiscal quarter may be impacted
by other events affecting retail sales.
Inflation
Inflationary factors, such as increases in our product and
overhead costs, could impair our operating results. Although we
do not believe that inflation has had a material impact on our
financial position or results of operations to date, a high rate
of inflation in the future may have an adverse effect on our
ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of sales
revenue if the selling prices of our products and services do
not increase with these increased costs.
Recently
Issued Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance for the
FASB accounting standards codification (Codification) and the
hierarchy of generally accepted accounting principles
(U.S. GAAP). The guidance establishes that the Codification
is the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. The
guidance and the Codification are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. We adopted the provisions of the
guidance, as required, and determined that the impact to our
financial condition or results of operations was immaterial.
In June 2009, the FASB issued new accounting guidance that
requires additional information regarding transfers of financial
assets, including securitization transactions, and companies
that have continuing exposure to the risks related to
transferred financial assets. The guidance eliminates the
concept of a qualifying special-purpose entity,
changes the requirements for derecognizing financial assets, and
requires additional disclosures. We became subject to the
guidance on January 1, 2010, and we are currently
evaluating the impact that the guidance will have on our
financial condition and results of operations.
In June 2009, the FASB issued new accounting guidance which
modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The guidance
clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other
things, an entitys purpose and design and a companys
ability to direct the activities of the entity that most
significantly impact the entitys economic performance. The
guidance requires an ongoing reassessment of whether a company
is the primary beneficiary of a variable interest entity. The
guidance also requires additional disclosures about a
companys involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. We
became subject to the guidance on January 1, 2010, and are
currently evaluating the impact that the guidance will have on
our financial condition and results of operations.
The FASB issued an update that all entities are required to make
disclosures about recurring and nonrecurring fair value
measurements under Fair Value Measurements. The guidance
requires certain new disclosures and clarifies two existing
disclosure requirements. The new disclosures and clarifications
of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years.
41
We do not believe that any other recently issued, but not yet
effective, accounting standards will have a significant effect
on its consolidated financial condition or results of operations.
Off
Balance Sheet Arrangements
We do not have any obligations that are not reflected on our
balance sheet.
42
OUR
BUSINESS
Overview
We believe we are the largest, full-service automated day spa
franchisor in the United States. We grant franchises for stores
operating under the Planet Beach name. As of January 15,
2010, we had 345 franchises located in 38 U.S. states,
Canada, Ireland, South Africa and Australia. We also had at that
date 20 additional franchises under development, including
proposed locations in one new state as well as in Egypt, Saudi
Arabia and Kuwait. In addition, at that date we had candidates
interested in re-opening 16 previously closed locations,
including one in an additional state.
Our Contempo Spas offer our customers a unique experience by
providing high quality automated day spa services. These
services include automated massages and facials, ultra violet or
U-V light therapy and sunless tanning. We provide
automated spa services through equipment such as hydro massage
and facial machines that do not require a therapist or
aesthetician. Instead, a spa employee programs individual spa or
U-V sessions and sets the desired time of the session through
the stores point of sale software. The customer activates
the session by pressing a start button in the treatment room and
may adjust the settings according to his or her preferences on
certain equipment such as hydro massage units.
Our spas also offer a variety of skin care, U-V and nutritional
products, as well as an on-line nutritional service.
We establish most of our domestic franchises through
intermediaries whom we call area representatives. We
grant development territories to area representatives in return
for a territory development fee. These development territories
are geographic regions within which area representatives are
entitled to market franchises and are obligated to train,
support and provide guidance to franchisees in the territory.
Our area representatives are entitled to a percentage of the
fees we earn when we sell a new franchise or transfer an
existing franchise to a new franchisee in the area
representatives territory. In some circumstances, we also
pay a percentage of those fees for new or transferred franchises
outside the area representatives territory obtained as a
result of the area representatives efforts. Additionally,
our area representatives are entitled to a percentage of
collected royalties that we receive from our franchisees in
their territories.
We establish most of our international franchises through
persons we refer to as master franchisors. Our
agreements with our master franchisors give them the right to
grant Planet Beach franchises in their assigned geographic
region. The master franchisors develop their own franchise
system in their areas. For example, the master franchisors are
required directly, or through area representatives whom they
appoint, to sell, train, support and provide guidance to
franchisees in their areas. The master franchisors owe us a
master franchise fee when we appoint them as a master
franchisor, additional fees or royalties upon the sale of
franchises and a percentage of the revenues generated by
franchise outlets in the assigned area.
We require our franchisees and master franchisors to purchase
U-V and spa equipment, as well as certain U-V, skin care and
nutritional products, from us or from suppliers we designate. We
receive a royalty for equipment and products sold to our
franchisees and master franchisors directly by the designated
supplier. All of the equipment, and approximately 53% of the
products, are sold under the Planet Beach private label.
We intend to grow our company significantly over the next ten
years, both domestically and internationally.
Our
Contempo Spa Concept
We were founded in 1996 as a U-V tanning franchise business.
However, in 2005, we substantially revised our business model to
adopt our Contempo Spa concept in response to the general
slowdown of sales in the tanning salon industry.
Our Contempo Spas offer U-V services along with traditional day
spa services such as facials, steam baths, and massages. These
spa services are performed by automated equipment such as
massage units or light therapy equipment, which reduces the
staffing that is required compared with a traditional day spa
operation.
43
Reducing the number of trained and certified employees required
to operate a Planet Beach franchise results in reduced operating
costs and a greater return on investment. The automated
equipment at our Contempo Spas allows our customers to take
advantage of more services in less time and at a lower cost than
at a traditional day spa. Additionally, we believe that the
quality of individual services offered at each repeat visit is
more consistent than at a traditional day spa where services are
provided by a therapist or aesthetician.
We do not own any long-term exclusive rights to use the
equipment featured in our Contempo Spas, some of which is also
used in malls, airports, massage therapist offices, and some
tanning franchises. However, we are not aware of any significant
competitor that employs the same automated day spa concept that
we have developed, using the same type and quantity of equipment
that we do.
Our Contempo Spas include some, or all, of the following
automated equipment:
|
|
|
|
|
aqua and hydro massage units that use heat and water pressure to
decrease muscle tension, and therasage and cyber-relax units
that reproduce the therapeutic benefits of a traditional
pressure massage;
|
|
|
|
hydro-derma fusion stations that combine infrared heat and
nutrient-rich steam to moisturize the skin;
|
|
|
|
luminous facial and hand units that use light therapy to improve
skin texture and tone, lighten age spots and diminish wrinkles;
|
|
|
|
misting spa units that use a cool mist spray which prompts
cellular skin renewal to diminish fine lines and wrinkles and
improve skin elasticity;
|
|
|
|
sunless tanning equipment that uses a tanning mist which is
sprayed onto the skins surface to create an artificial tan;
|
|
|
|
teeth whitening equipment designed to restore teeth color;
|
|
|
|
units that use infrared heating to deep heat the body and
aromatherapy for relaxation;
|
|
|
|
equipment that leads customers through guided meditation and
relaxation sessions to reduce stress, improve mental clarity or
promote lifestyle changes, such as weight loss or smoking
cessation; and
|
|
|
|
U-V light beds.
|
A spa employee programs individual spa or U-V sessions and sets
the desired time of the session through the stores point
of sale software. The equipment is then regulated by a
centralized management program which communicates with the timer
on each individual piece of equipment. The customer activates
the session by pressing a start button in the treatment room and
may terminate a session at any time using a stop button.
Customers may adjust the settings according to their preferences
on certain equipment such as hydro massage units.
In addition to our spa services, our locations offer an array of
retail products and specialty items that enhance the Contempo
Spa experience, including U-V lotions, spa accessories, spa
hydration products, nutritional products, holistic and skincare
products, and promotional merchandise.
We internally classify a Contempo Spa as a location that
includes our three key automated spa services (massage, facial
and hydration), a sunless tanning service and U-V therapy
services. At January 15, 2010, 204, or 59%, of our total
345 operating franchises had initially opened or converted to
the Contempo Spa format. Of the remaining 141 locations, 116, or
34%, provided some basic spa services in addition to U-V therapy
services, and 25, or 7%, provided only U-V therapy services. In
fiscal 2009, our Contempo Spas generally produced an average of
$5,300 more in monthly sales than the locations that provide
basic spa services, and an average of over $11,000 more in
monthly sales than locations that offer U-V services only. In
addition, same store sales at our Contempo Spas increased by an
average of 4% in 2009 over 2008, while same store sales for
basic spa and U-V only locations decreased by an average of 8%
in 2009 over 2008. Therefore, we are working vigorously to
convince our franchisees to convert to the Contempo Spa format.
44
Since 2007, we have required that all of our new locations open
as Contempo Spas. As of the date of this prospectus, our new
locations must open with approximately ten pieces of equipment
in total, of which at least 50% must be automated spa equipment.
NutritionSpa.com
Planet Beach customers who purchase a higher level of Contempo
Spa membership also have access to our web-based
NutritionSpa.com service. This service provides nutrition, skin
wellness, and weight control information, applications and
education. It also offers downloadable, customized meal plans,
corresponding recipes and a message portal to send and receive
messages to and from Planet Beachs team of experts in
nutrition and skincare. In the near future, we expect to add
features including an application that will formulate a
customized Planet Beach product and service regime.
NutritionSpa.com is intended for healthy adults and does not
give medical advice or opinions. We urge our customers to seek
the advice of a physician before beginning any weight loss
effort or regimen.
Our Sales
Platform and Customers
Our franchisees charge a monthly membership fee to customers for
different service offerings. Members can choose from different
service levels, some of which include only U-V services, while
others include U-V services, automated spa treatments and access
to our on-line NutritionSpa.com service. At the higher service
levels, members receive reciprocation rights that allow them to
visit any of our spa locations without paying an additional fee,
and they have unlimited access to all of our services at a
monthly cost that is comparable to or lower than the cost of a
single visit at a traditional day spa. Our monthly membership
fees program results in a stable revenue stream for our
franchisees. Our locations also offer services on an individual,
non-membership basis, and an array of retail U-V, skincare and
nutritional products.
In fiscal 2009, our locations served approximately 561,000
customers. Of those customers, approximately 162,000 were Planet
Beach members. Membership data indicates that the average age of
those members was 31, and approximately 88% were female. We also
have a system-wide database of all current and former Planet
Beach customers, which contained approximately 2.1 million
people at December 31, 2009.
Our
Industry
According to the International SPA Association, or ISPA, the spa
industry recognized $12.8 billion and $10.9 billion of
revenue in 2008 and 2007, respectively, an increase of
approximately 17.5%. Spa visits increased from
138 million visits in 2007 to 160 million visits in
2008, or 16%. According to ISPA, one in four Americans have been
to a spa. ISPA reports that at the end of 2008 there were 21,300
spas in the U.S., a 19% increase since the end of 2007, when
there were 17,900 U.S. spas. The number of spa locations in
the U.S. has increased at a five year average growth rate
of 17%. The spa industry can be divided into six categories: day
spas, resort and hotel spas, medical spas, club spas, mineral
spas, and cruise ship or destination spas. At the end of 2008,
approximately 79% of all spas in the U.S. were considered
to be day spas, which are spas in which patrons pay for
massages, facials or body treatments, and then leave the
premises following the services. Our franchises are part of this
day spa sector.
According to the U.S. Department of Commerce, sales of
health and personal care products such as the products we sell
in our franchises increased 3.3% from January 2009 to January
2010. In addition, Natural Marketing Institute, a market
research firm, reports that U.S. retail sales for the
consumer packaged goods health and wellness industry reached
more than $112 billion in 2008, representing growth of 9%
over 2007.
Mintel, a market research firm, reports that U.S. sales of
anti-aging skincare products, which are also a part of our
offerings, rose 13% to $1.6 billion between 2006 and 2008,
outpacing the general skincare segment, which was up 11% over
the same period.
The ICIS Chemical Business Report, published in November 2009,
reports that the fastest growing segment in the beauty industry
currently is nutraceuticals, with a projected 7.4%
compound growth rate through 2013. This market consists of
so-called beauty beverages such as beverages that
promote digestive health with probiotics and skin health with
antioxidants and superfoods, both of which we offer in our
nutritional product line.
45
We have also introduced a line of products at our franchises
called nutricosmetics. Also sometimes referred to as
beauty foods, these products include nutritional
supplements, instant protein shakes, fruit bars, acai packets
and other foods that are designed to improve and tone the skin,
boost the metabolism, encourage fat burning, improve circulation
and enhance beauty systemically. Kline Group, a consulting and
market research firm, indicates the global market for
nutricosmetics was valued at $1.5 billion in 2007, and the
industry is expected to reach $2.5 billion in sales by 2012.
With the introduction of our nutritional and holistic skin care
lines, as well as our success at converting to the Contempo Spa
model, we have aimed to place ourselves in the wellness
industry, an industry that, according to Natural Marketing
Institute, experienced $200 billion in revenue through 2008.
Our
Competition
As discussed above, we have developed the Contempo Spa concept
to distinguish our spas from traditional day spas and tanning
salons. However, our franchisees compete mostly with
independently owned tanning salons and day spas. We are not
aware of any significant competitor that has created a concept
that is similar to our Contempo Spa.
Our
Competitive Strengths
We believe that we have the following competitive strengths:
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Brand Market Differentiation and Brand
Loyalty. We are not aware of any other
significant franchise in the U.S. that uses our business
model. We believe that our position as the first company to
market the Contempo Spa concept has the potential to create
significant market share for us that will solidify our presence
as the industry leader when other companies begin to compete
with us in this sector. Our membership reciprocation rights that
allow members to visit any of our spa locations without paying
an additional fee is an important part of our strategy to build
brand loyalty. We believe we can attract customers of our
tanning salon competitors by introducing them to our spa
services.
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Use of Automated Spa Equipment Reduces our Labor Costs and
Has Customer Appeal. Through the use of automated,
non-attended spa equipment, our franchisees are able to reduce
labor costs because no staff members need be present during spa
treatments. This format also allows franchisees to offer
customers competitive and value-oriented pricing. In addition,
we believe that the use of automated equipment is attractive to
an expanded client base that desires spa services provided in
less time and at comparable or lower cost than a single visit to
a traditional day spa. We believe this model also has
significant appeal in countries where social customs emphasize
greater personal modesty. Furthermore, we believe that customers
find the services provided by automated equipment are more
consistent in quality from visit to visit than services provided
by a therapist or aesthetician.
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Capacity for Expansion. We intend to add
customers by increasing our sales network and increasing the
number of our outlets both domestically and internationally. In
2010, we believe our growth in open locations will primarily
occur internationally. At the end of 2010, we expect that we
will have approximately 28 locations outside the U.S., which
would be an increase of approximately 22% in international
locations from December 31, 2009. We expect to return to a
more rapid growth rate domestically after we expand our
franchise marketing efforts using the proceeds of this offering.
We believe we have developed an infrastructure that we can now
leverage to increase our outlet base domestically and serve as a
model for our international outlet growth. We expect this
infrastructure will help us to accommodate our rapid growth
effectively without the need to hire a significant number of
additional employees.
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Our Membership-Based Revenue Model Provides us with a
Consistent Revenue Stream. We are in significant part a
membership-based service business. This membership model creates
a recurring, stable revenue stream for our franchisees and,
ultimately, for us, as compared to some of our competitors who
charge for their services on an individual basis.
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Experienced Management Team. Our management
team has substantial experience in franchising, as well as the
spa and U-V industries, and also has significant experience in
growing brands and in the retail environment.
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Our Convenient Locations Help to Increase Our Customer
Base. We desire to become the neighborhood
spa for our customer base by positioning our outlets
mainly in larger urban area shopping centers. We believe our
outlets are well positioned to attract our target demographic.
Based on our customer surveys, we believe our primary target
market consists of women ranging from 25 to 35 years old,
with annual incomes of between $50,000 and $100,000 per
household, and who have attended college. We believe our
secondary target market consists of women ranging from of 36 to
50 years old, and men ranging from 30 to 50 years old,
with annual incomes of $50,000 to $100,000 per household, and
who have attended college.
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Our
Growth Strategy
We are committed to achieving our growth plan by pursuing the
following strategies:
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Increasing Overall Franchise Sales. Our
primary growth strategy is to increase the overall number of our
franchise locations. We intend to accomplish this through
increased marketing, including attending trade shows, as well as
brand development and increased advertising. In addition, we
intend to maintain a strong balance sheet, which will provide
potential franchisees with a certain level of confidence in our
financial position. To this end, we will use a portion of the
proceeds from this offering to reduce up to $1.8 million of
our current debt. Finally, we are continually exploring methods
to assist our franchisees in obtaining financing, which we
believe would remove the primary obstacle we have faced in
increasing our franchise sales since the third quarter of 2008.
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Conversion of Tanning Salons. The amount of
sales generated by a retail chains existing outlets over a
period of time is referred to as same store sales.
Same store sales are an important statistic because they
indicate what portion of our total revenue has been generated by
sales growth and what portion has been generated by the opening
of new stores. Our operating data suggests to us that our
Contempo Spa concept results in increased same store sales. At
January 15, 2010, 141, or 41%, of our franchise locations
had not yet converted to our Contempo Spa format, which includes
automated spa services, sunless tanning equipment and U-V
therapy services. Of these 141 locations, 25 provide only U-V
therapy services. We believe that the conversion of these 141
locations into our Contempo Spa concept should result in higher
per unit sales.
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International Expansion. We currently have
operating locations in Canada, Ireland, South Africa, and
Australia. We have sold a franchise in Egypt and expect a
location to open there in the Spring of 2010. We have entered
into master franchisor agreements, but do not yet have operating
locations, in Northern Ireland, the United Kingdom, Kuwait, and
Saudi Arabia. In addition, we are currently negotiating a master
franchisor agreement in the United Arab Emirates. We plan to
expand our brand further to other countries in Europe, New
Zealand, South America, Central America, the Middle East, and
Asia. In most cases, we enter into agreements and have
relationships only with our master franchisors, rather than the
individual franchisees. This arrangement reduces our costs and
therefore may result in higher profits for us over the long term.
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Product Development. We continue to evaluate
additional services that our franchisees might offer within our
Contempo Spa concept. The addition of new services at our
locations has historically resulted in new equipment sales and
improvement in same store sales. For example, we are currently
considering various sunless tanning services that would
complement our current products and services. In addition, we
periodically evaluate new franchise concepts that would
complement our core Contempo Spa business. We are now evaluating
a concept that would overlap with our existing customer base
without competing with the Planet Beach brand. In addition, it
would require a smaller initial investment by the franchisee
than is required for a Planet Beach franchise. We plan to begin
testing this concept in the late Spring and early Summer of
2010. We do not know when this testing will be complete, whether
it will be successful, or, if it is successful, when we might
begin recruiting franchisees.
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47
Franchises
As of January 15, 2010, we had 345 franchise outlets in the
United States, Canada, Ireland, South Africa and Australia, down
from 385 locations worldwide at the end of 2008. The following
table sets forth the location, by state and country, of these
outlets.
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State
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Outlets
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State
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Outlets
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State
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Outlets
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AL
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4
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MA
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2
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OR
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1
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AK
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1
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MD
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1
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PA
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6
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AZ
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18
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MI
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6
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SC
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4
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CA
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31
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MN
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17
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TN
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2
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CO
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6
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MO
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1
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TX
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33
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CT
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1
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MS
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3
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UT
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2
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DE
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1
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MT
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5
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WA
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2
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FL
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NC
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18
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WI
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1
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GA
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10
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NE
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1
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Canada
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18
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IA
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6
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NH
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1
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Australia
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2
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ID
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8
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NJ
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9
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Ireland
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1
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IL
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5
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NM
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2
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South Africa
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1
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IN
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4
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NV
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6
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KS
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2
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NY
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2
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LA
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49
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OK
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1
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TOTAL
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345
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Also at January 15, 2010, we had 20 additional spas under
development and another 16 potential re-openings of
previously closed locations. We also have agreements with some
of our domestic franchisees under which they have an option to
open one or more additional locations, for which they have
already paid us the initial franchise fee. These fees are not
refundable.
We do not depend on any one or group of individual franchisees.
Franchise
Agreements
To be eligible to be our franchisee, an individual must have a
minimum net worth of $350,000, access to at least $90,000 in
capital, and pass a background and credit check. He or she must
also show an enthusiasm for our brand and the discipline to
follow our business model, among other qualities.
Our minimum location size is generally 1,200 square feet.
We approve the proposed site for a franchise location and
consider factors such as the median household income for the
area, the cost of living and level of average disposable income
per household, population density and the attitude of the local
population concerning required travel times to a location.
Franchisees typically obtain bank financing, which may involve a
Small Business Administration loan, to fund their franchises. We
provide them a model business plan and pro forma financial
statements that they use to determine their financing and seek a
lender. We suggest financing alternatives based on our
experience with existing, similarly situated franchisees. We
typically award a franchise and accept the initial franchise fee
before the franchisee secures financing. The reason is that
lenders generally require proprietary information regarding the
franchise concept and a business plan before considering a loan.
Under our current form of agreement, our domestic franchisees
are required to pay us a $30,000 initial franchise fee, a
$21,000 fee if they purchased two additional unit locations, a
$35,000 fee if they purchased four additional unit locations,
and a $69,000 fee if they purchased nine additional unit
locations. In addition, the franchisees are required to purchase
all U-V and spa equipment and products from us, from master
franchisors who purchase the items from us, or from suppliers we
designate. We are entitled to a royalty of 6% per month of the
total sales at their spa locations and collect these royalties
mainly through AutoDraft drafts or credit card. In addition,
franchisees must pay us a percentage of their total monthly spa
sales for our
48
marketing and advertising programs. We obtain location sales
data via spa management software that we use under a license. At
December 31, 2009, we had 16 locations that are operated
under an older version of our franchise agreement or other
arrangements that require them to pay us a flat fee for
royalties ranging from $250 to $975 per month, or no fee as
described under Transactions with Related Persons.
Franchisees agree to indemnify us for all fines, suits, claims,
demands or obligations arising out of the obligations in the
franchise agreement, including training, construction or
operation of each spa. We may terminate the franchise agreement
without notice, without penalty and without giving the
franchisee any right to cure a default upon the occurrence of
various events, including, among other things, the
representatives filing a petition for bankruptcy under
federal or state bankruptcy laws, assigning the franchise
agreements without our prior written consent, defaults under the
lease or sublease for the spa location, and failing to comply
with the training requirements of the franchise agreement.
Our domestic franchisees are required to open their spa
locations within 275 days after entering into a franchise
agreement with us. If the domestic franchisee has purchased
additional units, the second and third unit is required to open
within 24 and 36 months, respectively, from the date of the
original franchise agreement. They are required to operate the
spas in accordance with our operations manual and to comply with
all applicable laws and regulations. The current version of our
franchise agreement has a term of fifteen years and can be
renewed by the franchisee for an additional five year term upon
expiration of the original term, as long as the franchisee is in
compliance with the terms and conditions of the franchise
agreement.
The terms and conditions of any future franchise agreements may
be different than those described above. We must file an annual
disclosure document in certain of the U.S. states in which
we have locations under state franchise law. We are required to
file the current version of our agreements with that document,
and if we make material changes to our agreements, we must amend
our state disclosure document at the time of the change.
The following table shows the number of franchise agreements
that will expire each year until 2024.
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Number of Franchise
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Year
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Agreements Expiring
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2010
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3
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2011
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9
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2012
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29
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2013
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79
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2014
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49
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2015
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12
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2016
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0
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2017
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0
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2018
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0
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2019
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0
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2020
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50
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2021
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38
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2022
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38
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2023
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27
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2024
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11
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345
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Area
Representative Agreements
At December 10, 2009, we had 23 area representatives for 27
territories, covering approximately 64% of our total domestic
locations and approximately 10% of the total
U.S. geographic land area. Each territory is governed by a
separate agreement. Of the 27 agreements, four will expire in
five years or less, 21 will expire in six to ten years, and two
will expire in 11 to 15 years.
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To be eligible to become an area representative, an individual
must have a net worth of $500,000, access to at least $200,000
in capital, have business and management experience and pass a
credit and background check. He or she must also have the
qualities we look for in a franchisee.
Area representatives sign an agreement with us that entitles
them to represent us in developing franchises within a defined
geographic territory. The term of the agreement is ten years,
with the option to renew for additional five year terms. They
must also execute a separate franchise agreement with us. The
area representative agreement requires an area representative to
market successfully one spa for every 40,000 people within
the area representatives territory. We reserve the right
to re-market territory of any area representative who does not
achieve this goal within one calendar year of becoming an area
representative.
We agree to provide training and support to area representatives
to assist them in performing their duties. Area representatives
must attend or participate in three separate training sessions
we provide, as well as our annual conventions. The area
representative is responsible for recruiting potential
franchisees whom they refer to us for evaluation, and to assist
the franchisee in opening a new franchise and providing ongoing
supervision, training, and support. We have a corporate
department dedicated to supervising and assisting our area
representatives. Area representatives are responsible for
attending bi-weekly training calls and are required to spend
$1,000 per month in their markets on franchise opportunity
marketing. We provide tools such as virtual seminars to assist
area representatives in their marketing efforts.
Area representatives are entitled to 50% of the initial
franchise fee we earn for sales of franchises in the area
representatives territory, if the franchise is sold or
when an existing franchise is transferred to a new franchisee in
the area representatives territory as a result of the area
representatives efforts. For sales of new franchises or
transfers of existing franchises in the area
representatives territory, but not as a result of his or
her efforts, the area representative is entitled to 20% of the
applicable fee. For sales of new franchises or transfers of
franchises outside the area representatives territory made
as a result of the area representatives efforts, the area
representative is entitled to 20% of the applicable fee as long
as the territory is not assigned to another area representative.
When a broker facilitates a transaction, we pay the area
representative for that territory 50% of the net fee after we
pay the brokers commission and our internal commissions.
Our area representatives are also entitled to 40% of collected
royalties that we receive from our franchisees in their
territories. We may terminate the area representative agreement
without penalty upon the occurrence of various events,
including, among other things, the representatives filing
a petition for bankruptcy under federal or state bankruptcy laws
or failing to comply with a mandatory development schedule
within the first calendar year after the execution of the area
representative agreement.
Master
Franchisor Agreements
At December 31, 2009, we had eight master franchisor
agreements in place, of which one will expire in 2020, five will
expire in 2023, and two will expire in 2024.
Potential master franchisors must have past business and
management experience, preferably with an emphasis in franchise
management. They must be committed to our brand and our overall
growth beyond the opportunity to profit from their individual
investment. They must also have a minimum net worth equal to
their entire investment, which includes the amount of their
territory fee and the cost of developing the first location in
their territory, which we call a flagship location.
Under our master franchisor agreements, we grant exclusive
rights to the master franchisor to grant international
franchises within a defined territory for a term of fifteen
years. The master franchisor must open at least one flagship
location controlled by the master franchisor within one year of
signing the agreement with us. The master franchisor is
responsible for marketing, selling and supervising franchises
located within that territory. He or she agrees to award
franchises according to a schedule negotiated with us, and
failure by the master franchisor to achieve the
agreed-upon
goals would allow us to declare a default of the master
franchisor agreement.
We provide guidance and support for the master franchisors
development responsibilities, including providing personnel to
train employees of the master franchisor and franchisees within
the territory. Master
50
franchisors pay us a territory fee based on the size of the
population in the territory at the execution of the master
franchisor agreement, a fee of $9,000 upon the signing of each
new franchise agreement, a 1.8% royalty on each locations
total monthly sales, an optional monthly technology fee of $190
and an optional monthly education fee of $69. Master franchisors
may terminate the master franchise agreement by giving
60 days written notice of a material breach of the
master franchise agreement by us and provided we do not cure the
default within the 60 days. We may terminate the master
franchise agreement, effective immediately upon notice to the
master franchiser upon the occurrence of various events,
including, among other things, filing a petition for bankruptcy
under federal or state bankruptcy laws or the failure to comply
with a mandatory development schedule and such failure continues
for a period of 30 days.
We sell equipment directly to foreign franchisees and pay a
portion of our profits to the master franchisor. If we manage
the relationship for the transaction with the equipment vendor,
we pay the master franchisor 40% of our profit on the sale. If
the master franchisor performs this role, we pay him or her 60%
of the profit. For flagship locations owned or controlled
directly by master franchisors, we sell them equipment and
products at discounts ranging from 15% to 25% of our domestic
rates. We also have equipment suppliers who sell directly to
foreign franchisees, and we receive royalties on these sales. We
share 60% of the royalty with the master franchisor.
Currently, we sell our private label products at a profit to an
international distributor, who resells them to our foreign
franchisees. The distributor also sells other national branded
products to our foreign franchises, and pays us a royalty from
those sales. We share 60% of our royalties with the master
franchisor for the applicable territory. However, we expect that
in the future we will sell our private label products to our
master franchisors for resale to foreign franchisees. We would
earn a profit at the time of sale to the master franchisor and
would have no further royalties on resales to the franchisees.
Our Australian locations are, and our proposed Egyptian location
will be, operated under a franchise agreement without a master
franchisor. The franchise agreements for those locations are
substantially similar to our agreement with our domestic
franchisees, with some exceptions. For example, the franchisee
is not required to pay us fees for brand development or
marketing and we will not perform those activities. We expect
that we may use the same or a similar arrangement in the future
for smaller countries where a master franchise structure is not
necessary.
Franchisee
Recruitment
We have two primary marketing channels for the recruitment of
prospective franchisees in the United States. Approximately 60%
of our U.S. franchisees are recruited by our area
representatives, who receive a commission for new franchise
sales and share franchise fees and royalties with us for the
franchises in their territory. We identify the remaining 40% of
our franchisees though internal marketing tools such as our
website and internet-based advertising. Occasionally we also
receive franchisee referrals from independent brokers, to whom
we pay a commission for referrals that ultimately result in an
award of a franchise.
For our international franchise operations, we identify master
franchisors primarily through trade shows and internet-based
advertising. In addition, we have also on occasion retained
U.S.-based
commercial services that specialize in facilitating partnerships
between U.S. and foreign businesses.
Our
Equipment and Suppliers
We have formed relationships with several equipment
manufacturers and other suppliers to maximize our buying power
over our U-V and spa equipment and products and to associate our
brand prominently with the equipment and products. We have
assisted with the design of most of the equipment and products
that our franchises offer and enjoy short-term exclusive rights
on certain of the offered equipment. In addition, we believe the
agreements that we have negotiated with these suppliers allow
our franchisees and master franchisors to purchase equipment at
an advantageous price compared to normal retail prices available
to individual business owners.
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We are not dependent on any single supplier. If any supplier
became unable to meet its obligations to us, we believe we could
readily replace it without difficulty.
In addition to carrying a thorough private label line of U-V,
skincare and nutritional products, which accounts for
approximately 53% of the products sold at our franchises, we
also carry Australian Gold and Swedish Beauty products. Our
private label products can only be purchased at Planet Beach
locations, but Australian Gold and Swedish Beauty products are
available at indoor tanning establishments.
We sell equipment and products directly to franchisees and
equipment directly to master franchisors and earn a profit on
those sales. We also have product suppliers or distributors who
sell directly to franchisees and master franchisors, and we earn
royalties on those sales.
Some of our equipment suppliers have agreed to indemnify us
against claims caused by the design or malfunction of their
equipment and we are listed as a co-insured on some equipment
suppliers liability policies.
Marketing
We engage in marketing and advertising activities for the
benefit of our domestic franchisees. Our master franchisors do
the same for our foreign locations. This section describes our
activities for domestic franchisees.
We strive to achieve the greatest possible national exposure
through our marketing programs. We believe we have formulated
our national marketing and advertising strategies in a manner
that achieves the maximum value for our marketing budget.
Our Ms. Planet Beach Spokesmodel Search has been our most
significant and successful marketing initiative since 2002. In
2009, the competition accounted for 70% of our national
marketing expense. Currently, the competition is produced for
television and syndicated throughout the United States. The
television show can also be viewed in some parts of Canada. The
2009 television show was aired across the U.S. beginning on
February 1, 2009 through June 1, 2009. The show was
ultimately aired in markets that represented a total of 64.7% of
U.S. households.
Also during the syndication period, our website traffic
increased by over 127,000 hits for the 12 month period
ending March 31, 2009 versus the prior year period. The
Ms. Planet Beach website also had an increase of hits from
671 beginning in the second quarter of 2008 to 15,271 hits as of
the end of the first quarter of 2009. The television show
directs viewers to our website for membership and franchise
information.
Domestic franchisees who entered into agreements with us before
April 1, 2008 are required to contribute 1% of gross sales
for our marketing and advertising programs. Domestic franchisees
who entered into agreements with us on or after April 1,
2008 contribute 2% of gross sales for this purpose. The funds
collected are used for the development and distribution of
national, regional and local marketing for the benefit of all
domestic franchisees within the Planet Beach system. In
addition, funds are used to create marketing materials and
public relations campaigns which promote the products and
services offered by our franchisees. Our marketing consists of
television, radio and print media advertisements. We are not
obligated under our franchise agreements or any other agreement
to spend any particular amount of fund contributions on the
placement of marketing in a particular territory or geographic
area.
We encourage our franchisees to form regional marketing
cooperatives for the benefit of our franchisees located within
the same geographic areas. Franchisees are required in their
franchise agreement with us to belong to the cooperative for
their area, if any. From time to time, we determine whether a
regional marketing cooperative is appropriate in a geographical
area, define the geographic area relevant to each regional
marketing cooperative, and determine the percentage of gross
sales each franchisee must contribute for each regional
marketing cooperative (which contribution may vary among
cooperatives, depending on marketing costs and requirements in
the region). Although we provide operating guidelines to
cooperatives, each cooperative is self-governing. We may change,
merge or dissolve any regional marketing cooperatives at our
discretion.
52
Our individual franchisees market their spas in the local
telephone directory or directories covering the area from which
the spa is likely to draw customers. Such marketing is placed in
accordance with size and content formulas we provide to the
franchisees. The cost of marketing in local telephone
directories is borne by the individual franchisee.
Our
Intellectual Property
Trademarks
Planet Beach Brands, L.L.C., a limited liability company that is
wholly-owned by Stephen Smith, our Chairman, President, Chief
Executive Officer and principal stockholder, has registered the
following proprietary trademarks on the Principal Register of
the United States Patent and Trademark Office, except for the
trademark Bronzen, which we registered.
|
|
|
|
|
|
|
Trademark
|
|
Date Registered
|
|
Registration Number
|
|
Planet Beach
|
|
June 10, 1997
|
|
|
2070046
|
|
Planet Beach
|
|
June 25, 2002
|
|
|
2585483
|
|
Planet Beach Tanning Spa Our Solar System Revolves Around
You
|
|
January 2, 2007
|
|
|
3195152
|
|
Planet Beach
|
|
September 6, 2005
|
|
|
2991967
|
|
Bronzen
|
|
January 10, 2006
|
|
|
3038872
|
|
Contempo Spa
|
|
September 25, 2007
|
|
|
3299750
|
|
Luminous Facial
|
|
October 30, 2007
|
|
|
3327379
|
|
Planet Beach
|
|
August 26, 2008
|
|
|
3491120
|
|
We have filed all required affidavits, and the registrations are
not yet due for renewal. Once registered, and assuming all
required affidavits are filed timely, the marks listed above
have a ten year term, and may be renewed for an additional ten
year term. We have also registered certain of our trademarks, or
have applications pending, in several foreign jurisdictions. We
do not own any state trademark registrations.
There are currently no effective determinations of the
U.S. Patent and Trademark Office, Trademark Trial and
Appeal Board, the trademark administrator of any state or any
court, no pending interference, opposition or cancellation
proceedings, nor any pending material litigation involving any
of the proprietary trademarks listed above.
We have entered into an agreement with Planet Beach Brands that
will become effective upon the consummation of this offering,
under which we will purchase the trademarks listed above and
other intellectual property from Planet Beach Brands, except for
the trademark Bronzen, which we already owned. We
will purchase the intellectual property in exchange for a
promissory note in the amount of $375,000, which we will repay
with the net proceeds of this offering. We also agreed to pay
Planet Beach Brands a monthly royalty equal to 0.5% of the
royalties we collect from our franchisees (excluding marketing
and other fees) in any month when those collected royalties
exceed $400,000. In addition, in the event that we terminate
Stephen Smiths employment without cause, if he resigns for
good reason, or if there is a change in control of our company,
Planet Beach Brands will be entitled to a royalty of 10% of our
collected royalties (excluding marketing fees) per month,
regardless of the amount of our collections. In all events, the
royalty payments will cease once they have totaled
$10 million.
Patents,
Copyrights and Proprietary Information
We do not own any registered patents or copyrights that are
material to our business. However, we claim common law copyright
and trade secret protection for several aspects of our franchise
system including our Operations Manual and our marketing and
business materials. There are no current determinations,
proceedings or litigation involving any of our copyrighted
materials.
53
Property
Our corporate headquarters is located at 5145 Taravella Road,
Marrero, LA 70072. We own two buildings at that location, each
with office and warehouse space having a combined total of
30,000 square feet. One of the buildings is subject to a
lien filed by the Internal Revenue Service for $30,361 related
mainly to taxes, penalties and interest stemming from our
Form 1120 tax return for 2003. This matter has been
resolved. We believe that these premises are adequate, suitable
and of sufficient capacity to support our current needs.
We operate one Planet Beach company store in Irvine, California
having a total of 1,876 square feet. We recently renewed
the location lease through August 31, 2011 and believe such
facility will be sufficient to meet our needs at that location
through at least that time.
From 2002 through 2005, our wholly-owned subsidiary Planet Beach
Real Estate, LLC entered into leases for various franchise
locations and sublet the premises to our franchisees. We have
discontinued this practice. However, at January 1, 2010,
Planet Beach Real Estate remained the sublessor or guarantor for
approximately three franchise locations, excluding our Irvine
store. These three leases are expected to be renewed by the
existing franchisee upon the expiration of the original lease
without Planet Beach Real Estate as a guarantor. All of these
leases are scheduled to expire on or before 2013.
Regulation
The U-V industry is regulated at both the state and federal
levels. Most of the applicable federal laws and regulations do
not affect us directly. Instead, those regulations primarily
govern manufacturers of U-V booths, beds and other devices that
we and our franchisees use. The principal federal laws
regulating the manufacture of U-V devices are the federal Food,
Drug and Cosmetic Act administered by the federal Food and Drug
Administration, or the FDA, the Public Health Service Act and
the Radiation Control for Health and Safety Act.
Because of the potential for injury and misuse of U-V devices,
the FDA has issued stringent rules and regulations governing the
manufacture and use of those devices. These regulations include
limits on the ultraviolet light emitted by U-V devices, safe
operation of such devices, timers, warning labels and the like.
We only purchase, and only permit our franchisees and master
franchisors to purchase, U-V devices that meet or exceed the
standards required by the FDA. For the personal safety of our
customers, we require our franchisees to monitor the use of U-V
beds and booths to assure compliance with the FDA guidelines.
The U-V beds and booths used by our franchisees are installed,
maintained and repaired by qualified employees or contractors in
accordance with manufacturers specifications.
The federal health care bill signed into law in March 2010
contains a 10% tax on U-V tanning services that will take effect
on July 1, 2010. We have not yet determined whether this
tax will be imposed on our spa memberships, but we believe it
would apply to sales of individual U-V therapy sessions and
could have a chilling effect on demand for U-V services
generally.
State regulation of the U-V industry varies from state to state.
Many states have no laws or regulations governing U-V services.
Currently, 31 states have either adopted or are in the
process of adopting laws and regulations dealing with the U-V
industry. State laws primarily regulate the health and safety
aspects of U-V facilities rather than regulating the U-V devices
used. Typically, states require a minimum customer age and
parental consent and supervision in some cases, use of
protective eyewear during any U-V session, maintenance of proper
exposure distance and maximum exposure time as recommended by
the manufacturer and availability of suitable physical aids such
as handrails.
In addition, a Food and Drug Administration advisory panel
recently recommended that the agency consider actions such as
requiring that teenagers get parental consent before using a
tanning bed or even banning the use of tanning beds among teens.
The panel also recommended reclassifying tanning lamps from
Class I medical devices a category that
includes tongue depressors and elastic bandages to a
Class II or Class III device, which would permit the
agency to impose greater restrictions. According to the
International Agency for Research on Cancer, which is affiliated
with the World Health Organization, or WHO, people
54
under 30 who use tanning machines increase their risk of skin
cancer by 75%. The WHO last July listed ultraviolet
radiation-emitting beds as carcinogenic to humans,
its highest category of cancer risk.
Violation of the federal or state laws or regulations could
result in criminal or civil penalties.
We are subject to stringent federal and state franchise laws
requiring extensive disclosures by franchisors to current and
prospective franchisees. State laws also prohibit fraud in the
sale of franchises. We believe we are in compliance with all
material federal and state franchise laws and regulations.
Our
Employees
Excluding contract labor, as of March 2, 2010, we employed
42 full-time employees and 1 part-time employee. The
following table sets forth the number of our employees by
function as of that date.
|
|
|
|
|
Functions
|
|
As of March 2, 2010
|
|
Franchise sales
|
|
|
5
|
|
Product and equipment sales
|
|
|
6
|
|
Customer and franchisee support
|
|
|
13
|
|
Information technology and marketing
|
|
|
6
|
|
Administration, accounting, and legal
|
|
|
9
|
|
Executive management
|
|
|
4
|
|
TOTAL
|
|
|
43
|
|
We believe that our future success will depend in part on our
continued ability to attract, hire and retain qualified
personnel. None of our employees are represented by a labor
union, and we believe our employee relations are good.
Insurance
We maintain property insurance for our administrative office
buildings. The combined limits of our commercial property,
commercial wind and hail, and flood policies total
$7.5 million. We also have other coverages, including
general liability insurance, business income insurance under our
commercial property policy, employment practices liability
insurance, errors and omissions insurance, directors and
officers liability insurance, workmans compensation
insurance, key-man life insurance and professional liability
insurance for our in-house lawyers. We also have commercial
insurance for our company store in Irvine, California. We
require each of our franchise locations to have a minimum of
$1 million in commercial general liability coverage and
certain other coverages. Our franchisees are also required under
their franchise agreements to maintain products liability
coverage and to name us as an additional insured. We believe our
insurance coverage is customary and standard for companies of
comparable size in comparable industries in the United States.
Litigation
From time to time, we become involved in various lawsuits and
legal proceedings that arise in the ordinary course of our
business. Almost all of these matters arise in connection with
business disputes between us and our franchisees, but on
occasion we have been a party to lawsuits by customers alleging
they were injured while using our spas. We require all of our
locations to have customers sign a form acknowledging the risks
of U-V and other services.
As of December 31, 2009, management, with the advice of
counsel, has determined that the likelihood of loss in any
pending matter is not reasonably probable or estimable.
Accordingly, we have not accrued any reserves in our
consolidated statements of operations in connection with these
lawsuits. However, litigation is subject to inherent
uncertainties, and future reserves may be required if losses are
deemed reasonably probable and estimable due to changes in our
assumptions, the effectiveness of legal strategies or other
factors beyond our control. An adverse result in these or other
matters or the creation of or changes to reserves could have a
material adverse effect on our business, financial condition or
operating results. We are vigorously defending
55
our position on all claims and proceedings pending as of
December 31, 2009. Moreover, we do not believe that any
pending actions or proceedings, either individually or in the
aggregate, will have a material adverse effect on our financial
condition, results of operations or cash flows.
Our
Corporate Structure
We were initially incorporated on September 26, 1996, under
the laws of the State of Louisiana. On March 25, 2008, we
reincorporated under the laws of the State of Nevada by merging
our predecessor Louisiana corporation into its newly-formed,
wholly-owned Nevada subsidiary. On March 18, 2010, we
changed our state of incorporation to Delaware by merging into
our newly-formed, wholly-owned Delaware subsidiary. As part of
the merger, we effected a 1 for 3.5 reverse stock split of our
common stock.
We conduct some of our operations through our wholly-owned
subsidiaries, principally Planet Beach International, LLC,
through which we conduct our international operations.
56
MANAGEMENT
Directors,
Executive Officers and Key Employees
The following sets forth the name and position of each of our
current executive officers and directors. With respect to our
directors, we have provided in their biographical information
below the experience and qualifications that led to the
conclusion that they should serve as a director.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Stephen P. Smith
|
|
|
47
|
|
|
President, Chief Executive Officer and Chairman of the Board of
Directors
|
Richard L. Juka
|
|
|
51
|
|
|
Senior Vice President, Chief Operating Officer, Secretary,
Treasurer and Director
|
Nancy M. Price
|
|
|
42
|
|
|
Senior Vice President of Sales
|
Tiffany Lassiegne
|
|
|
29
|
|
|
President of Domestic Operations
|
Craig M. Berner
|
|
|
47
|
|
|
Chief Financial Officer
|
Eric E. Bosch
|
|
|
42
|
|
|
Director
|
Gary N. Solomon
|
|
|
53
|
|
|
Director
|
Ronald Warner
|
|
|
65
|
|
|
Director
|
Stephen P. Smith. Mr. Smith is the
co-founder of the company and has served as President, Chief
Executive Officer and Chairman of the Board of Directors since
April 1996. He received a B.A. in Political Science from the
University of Mississippi, a Masters in Organizational
Management from the University of Phoenix, and the distinguished
Certified Franchise Executive designation from the International
Franchise Association for his work and study in the franchise
industry.
Mr. Smith has an extensive business background, which
includes being an entrepreneur since 1986. He opened and
operated Bodyplex Fitness Center from 1986 through 1989, Bay
Street Tanning Boutique from 1988 through 1989, and was a
licensee of three Golds Gym locations from 1989 through
1995. Mr. Smith also opened the original Planet Beach
location in New Orleans, Louisiana in 1995, which was first
called Electric Beach; he still owns this store today. In 1996,
Mr. Smith founded Planet Beach Franchising Corporation and
began franchising that same year.
Richard L. Juka. Mr. Juka is one of our
co-founders has served as our Senior Vice President, Chief
Operating Officer, Secretary, Treasurer and Director since July
1996. He has 25 years of management experience in retail,
wholesale and franchising businesses. Prior to joining Planet
Beach Franchising Corporation, Mr. Juka served as Store
Director and Field Operator for Pet Smart from 1991 until 1996.
He was with Pet Smart during their 1993 initial public offering.
Additionally, Mr. Juka worked for two publicly traded
companies in the home improvement industry. In 2002,
Mr. Juka received the designation of Certified Franchise
Executive from the International Franchise Association for his
work and study in the franchise industry. He has been a Planet
Beach franchisee since November 2, 2009.
Nancy M. Price. Ms. Price co-founded our
company with Messrs. Smith and Juka and has served as our
Senior Vice President of Sales since 1996. She was a member of
our board of directors from 1996 to 2010. She received the
designation of Certified Franchise Executive from the
International Franchise Association for her work and study in
the franchise industry.
Ms. Price studied health and physical education while
attending Southeastern Louisiana University at Hammond from 1986
through 1990. She has 13 years experience in the health
club industry and a total of 24 years experience in
membership sales. Additionally, Ms. Price acted as the
National Marketing Representative for Sydney Frank Importing
Company, Inc. from 1988 through 1992 and also acted in the role
of Corporate Trainer for the outside field staff of models and
promoters. She has been a Planet Beach franchisee since December
1996.
57
Tiffany Lassiegne. Ms. Lassiegne became
our President of Domestic Operations on January 1, 2010.
Until that time, she was our Vice President of Entertainment and
Media, a position she was promoted to in January 2008.
She began her career with Planet Beach in 2000 as the general
manager of a New Orleans area franchise location and has been
promoted into numerous positions within the company, including:
Franchise Relations Consultant from June 2003 until August 2005,
Franchise Relations Manager from August 2005 to December 2006,
Director of Franchise Relations from December 2006 until June
2007 and Senior Director of our Spa Tempo Media Department from
June 2007 to January 2008. She and her husband were also Planet
Beach franchisees from 2001 to 2003.
Ms. Lassiegne was previously employed as the Executive
Producer of the Early Morning News at WWL-870 am radio, an
Entercom Communications station in New Orleans, while attending
Loyola University working toward her undergraduate degree in
Business Management. In 2007, she earned her M.B.A. from the
University of Phoenix.
Craig M. Berner. Mr. Berner has served as
our Chief Financial Officer since August 2007. Prior to that
time, Mr. Berner served as Associate Controller and
Director of Accounting for Tulane University from October 1999
to August 2007, where his primary responsibilities included
overseeing all financial reporting, developing and monitoring
internal controls, managing the operations of the accounting
office, and preparing cash forecasts and capital budgets. He was
also Manager of Budgeting and Financial Reporting for Tidewater
Inc. from March 1998 to October 1999, and was responsible in
that position chiefly for all budgeting and financial reporting,
preparing quarterly and annual SEC filings, supervision of
accounting staff, and custody of corporation and insurance
reserve general ledger accounts. Mr. Berner, who is a
Certified Public Accountant, has a B.S. in Accounting from the
University of New Orleans and a M.B.A. from the A.B. Freeman
School of Business at Tulane University, with a concentration in
finance and management.
Eric E. Bosch. Mr. Bosch was elected to
our board of directors in 2010. He is a Certified Public
Accountant, licensed in both Louisiana and Mississippi. He has
been an equity director of the public accounting firm LaPorte
Sehrt Romig Hand since December 2008. He joined the firm in
January 1990 after graduating from the University of New Orleans
in 1989 with a B.S. in accounting. Mr. Bosch serves as the
engagement director for the accounting and assurance services
provided by the firm to a number of clients in several different
industries, as well as for clients that are public reporting
companies. He has assisted several of these clients with the
filings required for their initial public offerings, as well as
the subsequent filings required by the SEC.
Gary N. Solomon. Mr. Solomon was elected
to our board of directors in 2010. He has been the Chairman of
the Board and Chief Executive Officer of Crescent Bank and Trust
in New Orleans since 1991. He has also been an active venture
capitalist for the past 20 years, and currently has
investments in a shipping franchise, several restaurant
franchises and various real estate developments. He holds a B.S.
in Business Administration from the University of New Orleans.
Ronald Warner. Mr. Warner was elected to
our board of directors in 2010. He has been in the private
practice of law since 1968. Since July 2003, he has been a
senior corporate partner in the law firm of Locke Lord
Bissell & Liddell, where he heads the Corporate
Practice Group in the Los Angeles office of the firm.
Mr. Warners practice concentrates on
mergers & acquisitions, financings (from emerging
growth financing through larger multi-national public offerings)
and compliance with federal and state securities laws and
Foreign Corrupt Practices Act matters. Mr. Warner currently
serves on the Boards of Directors of Senetas Corporation
Limited, an Australian public company that designs and
distributes encryption products world-wide, and Elite
Interactive Solutions, Inc., a privately held company located in
Los Angeles, California, that offers software monitoring
products and services for facilities. He also serves on the
Advisory Boards of a number of technology and services companies
in the United States and other countries. Mr. Warner
received his Juris Doctorate degree with honors from the New
York University School of Law, where he was appointed as an
editor of the Law Review, after receiving his Bachelor of Arts
degree from Tulane University.
58
Board of
Directors
Our board of directors is composed of five members, divided into
three classes. This classification of the board of directors may
delay or prevent a change in control of our company or our
management. See Description of Securities
Certain Charter, Bylaw and Statutory Provisions.
Director
Independence
Our board of directors has affirmatively determined that
Messrs. Bosch, Solomon and Warner meet the definition of
independent director under the rules of the NYSE
Amex.
Board
Committees
Our board of directors has two standing committees: an audit
committee and a governance, compensation and nominating
committee. Each of those committees has the composition and
responsibilities set forth below.
Audit
Committee
The members of the audit committee are Messrs. Bosch
(Chair), Solomon and Warner. None of the members of the audit
committee are, or have been, our officers or employees, and each
member qualifies as an independent director as defined by the
rules of the NYSE Amex, Section 10A(m) of the Securities
Exchange Act of 1934, and SEC rules. The board of directors has
determined that Mr. Bosch meets the definition of an
audit committee financial expert as that term is
used in Item 401(h) of
Regulation S-K
under the Securities Exchange Act.
Under its written charter, the audit committees purpose is
to oversee the integrity of our financial statements and
internal controls, our compliance with applicable legal and
regulatory requirements and the qualifications and independence
of our independent registered public accounting firm. To further
this purpose, the audit committee has the sole authority to
appoint and, when deemed appropriate, replace our independent
registered public accounting firm, and has established a policy
of pre-approving all audit and permissible non-audit services
provided by our independent registered public accounting firm.
The audit committee has, among other things, the responsibility
to evaluate the qualifications and independence of our
independent registered public accounting firm; to review and
approve the scope and results of the annual audit; to review and
discuss with management and the independent registered public
accounting firm the content of our financial statements before
the filing of our quarterly reports and annual reports; to
review the content and clarity of our proposed communications
with investors regarding our operating results and other
financial matters; to review significant changes in our
accounting policies; to establish procedures for receiving,
retaining, and investigating reports of illegal acts involving
us or complaints or concerns regarding questionable accounting
or auditing matters, and to supervise the investigation of any
such reports, complaints or concerns; to establish procedures
for the confidential, anonymous submission by our employees of
concerns or complaints regarding questionable accounting or
auditing matters; and to provide sufficient opportunity for the
independent auditors to meet with the committee without
management present.
Corporate
Governance, Compensation and Nominating Committee
The corporate governance, compensation and nominating committee
is comprised of Messrs. Bosch, Solomon and Warner (Chair),
each of whom has been determined by our board of directors to
qualify as independent director as defined by the rules of the
NYSE Amex, Section 10A(m) of the Securities Exchange Act of
1934, and SEC rules.
With respect to compensation, the committee discharges the
responsibilities of our board of directors relating to
compensation of our chief executive officer and other officers,
including reviewing and approving the performance goals and
objectives of our chief executive officer and other officers,
evaluating the performance of those persons in light of the
goals and objectives and ensuring that compensation of our
executives reasonably relates to achieving the goals and
objectives. The committee has, among other things, the
responsibility to administer our stock plans, including granting
options and awards under the stock plans,
59
to review with management the compensation disclosures included
in our annual proxy statement, and to provide a report on
compensation for our proxy statement.
The purpose and responsibilities of the committee related to
nominating candidates for director include considering the
appropriate size, function and needs of our board of directors,
developing criteria for membership on our board of directors,
and identifying and recommending candidates to fill positions on
our board of directors. The responsibilities of the committee
related to corporate governance include, among other things,
considering possible conflicts of interest of board members and
senior executives, monitoring various committees of our board of
directors, developing and reviewing annually our corporate
governance principles, and reviewing and approving transactions
with related persons in excess of $120,000.
Director
Compensation
During the 2008 and 2009 fiscal years and until the consummation
of this offering, no member of our board of directors received
or will receive any compensation for service as a director. Upon
the consummation of this offering, our directors who are not our
employees will be entitled to an annual cash retainer for their
services as director in the amount of $12,000 as long as they
attend at least one board of directors meeting each calendar
quarter.
Family
Relationships
There are no family relationships between any of our directors
or executive officers.
EXECUTIVE
COMPENSATION
Summary
Compensation Table 2008 and 2009
The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to our
chief executive officer and each of our other two most highly
compensated executive officers as of the end of the last fiscal
year. We refer to these persons as our named executive officers
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
All
|
|
|
|
|
|
|
|
|
Option
|
|
Incentive Plan
|
|
Other
|
|
|
Name and
|
|
|
|
Salary
|
|
Awards(1)
|
|
Compensation(2)
|
|
Compensation(3)
|
|
Total
|
Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Stephen P. Smith
|
|
|
2009
|
|
|
|
242,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,813
|
|
President, Chief Executive Officer
|
|
|
2008
|
|
|
|
259,000
|
|
|
|
279,142
|
|
|
|
|
|
|
|
13,382
|
|
|
|
551,524
|
|
and Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard L. Juka
|
|
|
2009
|
|
|
|
185,625
|
|
|
|
|
|
|
|
22,567
|
|
|
|
|
|
|
|
208,192
|
|
Senior Vice President,
|
|
|
2008
|
|
|
|
198,000
|
|
|
|
67,185
|
|
|
|
55,264
|
|
|
|
11,430
|
|
|
|
331,879
|
|
Chief Operating Officer,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secretary and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig M. Berner
|
|
|
2009
|
|
|
|
131,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,240
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
|
140,000
|
|
|
|
135,450
|
|
|
|
|
|
|
|
7,000
|
|
|
|
282,450
|
|
|
|
|
(1) |
|
Reflects the aggregate grant date fair value of option awards
computed in accordance with FASB ASC Topic 718. For more
information, see Note 6 to our consolidated financial
statements for fiscal year 2009. |
|
(2) |
|
The amounts in this column consist of, for Mr. Juka, a
bonus equal to 5% of our net profits from sales of spa products
and equipment for the fiscal year. |
|
(3) |
|
Consists of company contributions in 2008 to the executive
officers 401(k) plan account. |
We have entered into employment agreements with both Stephen P.
Smith, our President, Chief Executive Officer and Chairman, and
Richard K. Juka, our Senior Vice-President, Chief Operating
Officer, Secretary and Treasurer. Each of the employment
agreements has an initial term of three years and automatically
extends each day for an additional day until we give notice of
our election to cease these extensions. Mr. Smith and
60
Mr. Juka are entitled to annual salaries of $259,000 and
$198,000, respectively, subject in each case to increase (but
not decrease) by determination of the boards compensation
committee, and may be awarded a bonus of up to 50% of their
salaries for the companys achievement of certain
milestones to be established annually by the compensation
committee. In addition, Mr. Juka is entitled to receive a
monthly bonus of 5% of the net profit of the companys
equipment department. Mr. Smiths employment agreement
permits him to continue to operate the one Planet Beach location
he currently owns and any other businesses he may establish
during the term of the employment agreement by agreement with us
without any obligation to pay us any royalty or franchise fee.
Each of the employment agreements may be terminated by us or the
employee at any time. If we terminate either Mr. Smith or
Mr. Juka without cause (as defined in the
employment agreements), or Mr. Smith or Mr. Juka
terminates his employment agreement for good reason
(as defined in the employment agreements), he would be entitled
to receive payment equal to three years annual salary at
its then current level, payments of any bonuses that would have
been earned for the three years following termination, vesting
of all unvested benefits in all equity incentive and retirement
plans that they were participating in at the time of
termination, and insurance benefits for the three years
following termination. In any event, following termination,
Mr. Smith and Mr. Juka are prohibited from competing
with us or soliciting our employees, franchisees and customers,
for a period of two years after the termination of employment,
except that Mr. Smith and Mr. Juka are permitted to
continue to operate the one Planet Beach location they each own,
respectively, and any other businesses they may establish during
the term of the employment agreement by agreement with us.
In addition, we have entered into an Asset Purchase Agreement
with Mr. Smith and Planet Beach Brands, L.L.C., a limited
liability company owned solely by Mr. Smith, pursuant to
which Planet Beach Brands assigned to us all of the trade names
and trademarks owned by it under which we conduct our business
and in exchange for which we have committed to pay it $375,000
and monthly, in perpetuity, 0.5% of the amount collected by us
as the royalty fees paid by our franchisees as a percentage of
their gross sales for each month in which aggregate collections
exceed $400,000. However, if we terminate Mr. Smiths
employment without cause (as defined in his
employment agreement), he terminates his employment with
good reason (as defined in his employment
agreement), or there is a change in control of our company, the
monthly payments we owe Planet Beach Brands will increase to 10%
of the amount we collect as royalty fees paid by our franchisees
as a percentage of their gross sales, without regard to the
gross amount of such collections in the month. Total amounts
payable to Planet Beach Brands or Mr. Smith under this
agreement may not exceed $10,000,000. The agreement will become
effective upon consummation of this offering.
Currently, compensation for the named executive officers is
based on what we believe to be the prevailing marketing
conditions in the United States southern region for a company of
our size.
In fiscal 2008 and 2009, we had an unwritten understanding with
Messrs. Smith and Juka that they would earn a bonus of 5%
and 3%, respectively, of our net income after taxes in
profitable years. We have not paid a bonus under this
arrangement because we incurred net losses in those years.
61
Outstanding
Equity Awards at Fiscal Year End 2009
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Number of
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Number of
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Securities
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Securities
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Underlying
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Underlying
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Unexercised
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Unexercised
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Option
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Option
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Grant
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Options
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Options
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Exercise
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Expiration
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Name
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Date
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(#) Exercisable
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(#) Unexercisable
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Price ($)
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Date
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Stephen P. Smith
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9/1/2008
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54,956
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151,129
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3.50
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9/1/2018
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President, Chief Executive Officer
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and Chairman of the Board
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Richard L. Juka
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9/1/2008
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13,227
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36,374
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3.50
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9/1/2018
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Senior Vice President,
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Chief Operating Officer,
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Secretary and Treasurer
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Craig M. Berner
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8/29/2007
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6,905
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7,381
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3.50
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8/29/2017
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Chief Financial Officer
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9/1/2008
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26,667
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73,333
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3.50
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9/1/2018
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Options granted under our 2005 Stock Option Plan expire ten
years from the date of grant. Generally, either 20% or 25% of
the options vest on the first anniversary of the grant.
Thereafter, the options vest monthly on a pro rata basis until
the fourth or fifth anniversary of the grant until fully vested.
We have a defined contribution employee benefit or 401(k) plan.
The plan is available to employees who have completed at least
three months of service and are at least 18 years old.
Before December 1, 2008, the company matched 25% of each
dollar contributed up to 4% of the employees annual
salary. The employer contribution vests fully after five years.
We temporarily suspended matching contributions beginning
December 1, 2008. Our expense during 2009, 2008 and 2007
associated with the plan totaled $0, $56,099, and $38,882,
respectively. We have not determined if and when we will
reinstate the company match.
We do not believe that there are risks arising from our
compensation policies and practices that are reasonably likely
to have a material adverse effect on our business.
TRANSACTIONS
WITH RELATED PERSONS
We describe below certain transactions and series of similar
transactions that have occurred this year or during our last two
fiscal years to which we were a party or will be a party,
including transactions in which:
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the amounts involved exceeded or will exceed $120,000; and
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a director, executive officer, or holder of more than 5% of our
common stock or any member of his or her immediate family had or
will have a direct or indirect material interest.
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Stephen Smith, our President, Chief Executive Officer, Chairman
of the Board and majority stockholder, owns a Contempo Spa that
does not pay royalties to us. This location was the first Planet
Beach location and opened before Planet Beach Franchising
Corporation was formed. Under the terms of our first form of
franchise agreement, which was executed for the first time in
1996, royalties payable to us were fixed at $250 per month for
the duration of the agreement. Therefore, the amount of
royalties that would have been paid by this location to us if it
were subject to the franchise agreement would have been $3,000
annually, or approximately $42,000 since 1996.
Richard Juka, our Senior Vice President, Chief Operating
Officer, Secretary, Treasurer and Director,
co-owns a
Contempo Spa location that opened on November 2, 2009.
Mr. Juka and his partner do not pay the 6% royalty that
would be required under our current franchise agreement. Rather,
they pay us a fixed monthly fee of $350. In addition, instead of
paying the required 2% of gross sales to us per month for brand
development, they pay 1% of gross sales per month for this
purpose. For fiscal year 2009, the amount that would have been
payable to us from this location under our current form of
franchise agreement would have been $743. The amount actually
invoiced for fiscal year 2009 under our arrangement with
Mr. Juka was $792.
62
We have entered into an agreement with Planet Beach Brands,
L.L.C., that will become effective upon the consummation of this
offering, under which we will purchase trademarks and other
intellectual property from Planet Beach Brands. Planet Beach
Brands is wholly-owned by our Chairman, President, Chief
Executive Officer and principal stockholder, Stephen Smith. We
will purchase the intellectual property in exchange for a
promissory note in the amount of $375,000, which we will repay
with the net proceeds of this offering. We also agreed to pay
Planet Beach Brands a monthly royalty equal to 0.5% of the
royalties we collect from our franchisees (excluding marketing
and other fees) in any month when those collected royalties
exceed $400,000. In addition, in the event that we terminate
Stephen Smiths employment without cause, if he resigns for
good reason, or if there is a change in control of our company,
Planet Beach Brands will be entitled to a royalty of 10% of our
collected royalties (excluding marketing fees) per month,
regardless of the amount of our collections. In all events, the
royalty payments will cease once they have totaled
$10 million.
We issued a note payable to New Sunshine LLC at 7% interest due
on April 10, 2012 for our purchase of U-V products. This
note is secured by 85,714 shares of our common stock owned
and pledged by Mr. Smith. During fiscal 2008 and 2009, the
largest aggregate amount of principal outstanding on the note
was $750,000, and the amount outstanding at December 31,
2009 was $515,739. We paid $110,153 in principal and $38,808 in
interest on the note in fiscal 2008 and $124,108 in principal
and $41,486 in interest in fiscal 2009.
A substantial amount of our indebtedness has been personally
guaranteed by certain of our officers and directors, including
indebtedness that we intend to repay with the proceeds of this
offering, as described below. See Use of Proceeds
for more information about our intended use of the proceeds of
the offering.
Our indebtedness that has been guaranteed by our officers and
directors consists of:
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our 6.54% note to Capital One Bank due March 9, 2027
for the purchase and improvement of our corporate headquarters.
This note has been personally guaranteed by Mr. Smith and
Mr. Juka. The largest aggregate amount of principal
outstanding on the note was $890,737 during fiscal 2008 and
2009, and the amount outstanding at December 31, 2009 was
$840,008. We paid $24,630 in principal and $57,511 in interest
on the note in fiscal 2008 and $26,099 in principal and $55,900
in interest in fiscal 2009.
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our 5.79% note to the Small Business Administration due
June 1, 2027 for the purchase and improvement of our
corporate headquarters. This note has been personally guaranteed
by Mr. Smith and Mr. Juka. The largest aggregate
amount of principal outstanding on the note was $623,771 during
fiscal 2008 and 2009, and the amount outstanding at
December 31, 2009 was $591,280. We paid $13,052 in
principal and $35,888 in interest on the note in fiscal 2008 and
$19,439 in principal and $34,521 in interest in fiscal 2009.
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our 8.25% note to Whitney National Bank due July 19,
2012 to fund operations. This note has been personally
guaranteed by Mr. Smith and Mr. Juka. The largest
aggregate amount of principal outstanding on the note was
$727,030 during fiscal 2008 and 2009, and the amount outstanding
at December 31, 2009 was $619,305. We paid $51,545 in
principal and $58,210 in interest on the note in fiscal 2008 and
$56,180 in principal and $53,596 in interest in fiscal 2009.
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Nancy Price, our Senior Vice President of Sales, Shannon Aleman,
who is Mr. Smiths sister, and certain of our
employees own Planet Beach franchises. The terms of those
franchise arrangements are no less favorable to us than those
that were applicable in our standard franchise agreements that
were in effect for other franchises at the time those franchises
were established. The total revenue due to us from each of those
franchisees in 2009 was less than $120,000.
As of December 31, 2009, Ms. Aleman owed us $35,671 in
initial franchise fees and other fees. In addition, one of our
employees, who is also a stockholder, owns two franchise
locations for which we are currently deferring royalties. At
December 31, 2009, the amount of deferred royalties from
these two locations totaled $39,783. Also, another of our
employees, who is also a stockholder, owed us $73,682 at
December 31, 2009 in unpaid area representative territory
fees.
63
On November 18, 2009, Mr. Smith loaned us $50,000 for
the payment of expenses related to this offering. The note is to
be repaid with 5% interest (for a total repayment amount of
$52,500) upon completion of the offering.
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of our common stock as of March 18,
2010 for: (i) each person known by us to beneficially own
more than 5% of our voting securities, (ii) each named
executive officer, (iii) each of our directors, and
(iv) all of our named executive officers and directors as a
group. The information in the table reflects the 1 for 3.5
reverse stock split we effected on March 18, 2010 and
assumes no exercise of the warrants included in the units we are
offering or the representatives warrants.
Beneficial ownership is determined in accordance with
Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as
amended. Except as otherwise indicated, each person or entity
named in the table has sole voting and investment power with
respect to all shares of our capital stock shown as beneficially
owned, subject to applicable community property laws.
We have assumed no exercise of outstanding options (other than,
in the case of each individual or entity listed in the table
below, stock options held by that individual or entity that will
be exercisable for our common stock on or before May 31,
2010).
The number of shares of common stock outstanding before this
offering is 3,713,925.
The percentage of common stock beneficially owned after this
offering is based
on shares
of common stock to be outstanding after this offering, which
includes shares
of common stock being offered for sale as part of the units
being offered in this offering but assumes no exercise of the
warrants issued in connection with this offering or the
underwriters over-allotment option.
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Percent of
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Percent of
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Common
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Common
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Name and Address
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Shares Beneficially
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Stock Before
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Stock After
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of Beneficial Owner(1)
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Owned(2)
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the Offering
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the Offering
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Stephen P. Smith
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2,545,363
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65
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%
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President, Chief Executive Officer and Chairman of the Board
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Richard L. Juka
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612,571
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16
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%
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Senior Vice President, Chief Operating Officer,
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Secretary, Treasurer and Director
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Craig M. Berner
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43,095
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1
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%
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Chief Financial Officer
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Nancy M. Price
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371,021
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9
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%
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Senior Vice President of Sales
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Eric E. Bosch
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0
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0
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%
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0
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Director
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Gary N. Solomon
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0
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0
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%
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0
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Director
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Ronald Warner
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0
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0
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%
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0
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%
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Director
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All named executive officers and directors as a group
(6 persons)
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3,572,050
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96
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%
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(1) |
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The address of all persons listed is 5145 Taravella Road,
Marrero, LA 70072. |
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(2) |
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Includes 72,130, 17,360, 43,095 and 10,510 shares
underlying exercisable options and options that will become
exercisable on or before May 31, 2010 for Mr. Smith,
Mr. Juka, Mr. Berner and Ms. Price, respectively. |
64
DESCRIPTION
OF SECURITIES
Capital
Stock
We are authorized to issue up to 100,000,000 shares of
common stock, par value $0.0001 per share and
10,000,000 shares of preferred stock, par value $0.0001 per
share. As of March 18, 2010, we had a total of 3,836,611
shares of common stock issued and 3,713,925 shares
outstanding. We have no shares of preferred stock outstanding.
We also have options outstanding to purchase 552,571 shares
of our common stock. The number of options outstanding excludes
shares subject to an option held by one of our vendors to
convert balances due under our note payable within
12 months of this offering at a conversion price equal to
the initial public offering price.
After this offering, we will
have shares
of common stock outstanding,
or shares
outstanding if the underwriters exercise their over-allotment
option in full. This assumes no warrants are exercised.
Common
Stock
Each share of our common stock entitles its holder to one vote
per share on all matters coming before the stockholders.
Stockholders do not have preemptive rights to purchase shares in
any future issuance of our common stock and the common stock is
not convertible into any other security. Upon our liquidation,
dissolution or winding up, and after payment of creditors and
preferred stockholders, if any, our assets will be divided
pro-rata on a share-for-share basis among the holders of the
shares of common stock.
The holders of shares of our common stock are entitled to
dividends out of funds legally available when and as declared by
our board of directors.
All of the issued and outstanding shares of our common stock are
duly authorized, validly issued, fully paid and non-assessable.
Preferred
Stock
We are authorized to issue up to 10,000,000 shares of
preferred stock in one or more classes or series within a class
as may be determined by our board of directors, who may
establish, from time to time, the number of shares to be
included in each class or series, may fix the designation,
powers, preferences and rights of the shares of each such class
or series and any qualifications, limitations or restrictions of
the class or series. Any preferred stock so issued by the board
of directors may rank senior to the common stock with respect to
the payment of dividends or amounts upon liquidation,
dissolution or winding up of us, or both. Moreover, under
certain circumstances, the issuance of preferred stock or the
existence of the unissued preferred stock might tend to
discourage or render more difficult a merger or other change of
control or could hurt the market price of our securities.
Units
The units we are offering in this prospectus consist of one
share of our common stock and one redeemable common stock
purchase warrant. We have applied to list the units for trading
on the NYSE Amex under the symbol PBFCU on or
promptly after the date of this prospectus. Each of the shares
and the warrants may be traded separately 35 days after the
date of this prospectus. Once the shares and warrants begin
separate trading, we anticipate the shares will be listed on the
NYSE Amex under the symbol PBFC and the warrants
will be listed on the NYSE Amex under the symbol
PBFCW, but we cannot assure you that our securities
will be so listed or, if listed, will continue to be listed.
Warrants
The warrants included in the units we are offering entitle the
holder to purchase one share of common stock at a price of
$ per share, subject to adjustment
as discussed below, at any time after 9:30:01 a.m., New York
time,
on ,
2010. The warrants will expire at 5:00 p.m., New York time,
on ,
65
2013, or earlier upon redemption. After completion of this
offering, warrants for shares
of our common stock will be outstanding.
We may redeem the outstanding warrants at a price of
$ per warrant at any time upon a
minimum 15 days prior written notice of redemption
and if, and only if, the closing price of our common stock
equals or exceeds $ per share for
a period of ten consecutive trading days.
If the foregoing conditions are satisfied and we call the
warrants for redemption, each warrant holder shall then be
entitled to exercise his or her warrant before the date which is
two business days before the date scheduled for redemption. We
do not need the consent of our underwriters in order to redeem
the outstanding warrants.
The warrants will be issued in registered form under a warrant
agreement
between
as warrant agent, and us. You should review a copy of the
warrant agreement, which has been filed as an exhibit to the
registration statement of which this prospectus is a part, for a
complete description of the terms and conditions applicable to
the warrants.
The exercise price and number of shares of common stock issuable
on exercise of the warrants may be adjusted in certain
circumstances including in the event of a stock split or stock
dividend, or our recapitalization, reorganization, merger or
consolidation.
The warrants may be exercised upon surrender of the warrant
certificate on or before its expiration date at the offices of
the warrant agent, with the exercise form on the reverse side of
the warrant certificate completed and executed as indicated,
accompanied by full payment of the exercise price, by certified
or bank cashiers check payable
to ,
for the number of warrants being exercised. Warrant holders will
not have any voting rights or any other of the rights or
privileges of holders of common stock until they exercise their
warrants and receive shares of common stock. After the issuance
of shares of common stock upon exercise of the warrants, each
holder will be entitled to one vote for each share held on
record on all matters to be voted on by stockholders.
No warrants will be exercisable and we will not be obligated to
issue shares of common stock unless at the time a holder seeks
to exercise such warrant, a prospectus relating to the common
stock issuable upon exercise of the warrants is current and the
common stock has been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of
the holder of the warrants. In addition, holders of the warrants
are not entitled to net cash settlement and the warrants may
only be settled by delivery of shares of our common stock and
not cash. Under the terms of the warrant agreement, we have
agreed to use commercially reasonable efforts to meet these
conditions and to maintain a current prospectus relating to the
common stock issuable upon exercise of the warrants until the
expiration of the warrants. However, we cannot assure you that
we will be able to do so and, if we do not maintain a current
prospectus relating to the common stock issuable upon exercise
of the warrants, holders will be unable to exercise their
warrants and we will not be required to settle any such warrant
exercise. If the prospectus relating to the common stock
issuable upon the exercise of the warrants is not current or if
the common stock is not qualified or exempt from qualification
in the jurisdictions in which the holders of the warrants
reside, the warrants may have no value, the market for the
warrants may be limited and the warrants may expire worthless.
We will not issue fractional shares upon exercise of the
warrants. If, upon exercise of the warrants, a holder would be
entitled to receive a fractional interest in a share, we will,
upon exercise, round up or down to the nearest whole number to
determine the number of shares of common stock to be issued to
the warrant holder.
Certain
Charter, Bylaw and Statutory Provisions
Certain provisions of our certificate of incorporation and
bylaws and Delaware law are described below.
Classified board of directors. Our certificate
of incorporation divides the members of our board of directors
into three classes, which are designated Class A,
Class B and Class C. The initial Class A
directors are Messrs. Bosch and Juka, who serve for a term
expiring at our annual meeting of stockholders in 2011. The
66
initial Class B Director is Mr. Solomon, who serves
for a term expiring at our annual meeting of stockholders in
2012. The initial Class C Directors are Messrs. Smith
and Warner, who serve for a term expiring at our annual meeting
of stockholders in 2013. Thereafter, the members of each class
serve for a three year term. The terms are staggered, which
means that each year the term of only one of the classes
expires. Staggering directors terms makes it more
difficult for a potential acquiror to seize control of a target
company through a proxy contest, even if the acquiror controls a
majority of the companys stock, because only one-third or
fewer of the directors stand for election in any year and
directors may only be removed for cause.
Stockholder Meetings. Our certificate of
incorporation provides that only the chairman of our board or a
majority of our directors may call a special meeting of
stockholders. Stockholders must give advance notice of
nominations for the election of directors and of business to be
brought by stockholders before a stockholders meeting in
the manner provided in our bylaws. Our charter also provides
that stockholders may not take any action by written consent.
Limitation of liability of directors and
officers. Our certificate of incorporation
provides that our directors will not be liable to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty to the fullest extent allowed by the General
Corporation Law of the State of Delaware as it now exists or it
may be amended in the future. The General Corporation Law of the
State of Delaware provides that a corporation may provide that a
director will not be liable to the corporation or its
stockholders for monetary damages arising from a breach of their
fiduciary duties, except for:
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breaches of a directors or officers duty of loyalty
to us or our stockholders;
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acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law;
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liability for unlawful payments or dividends or unlawful stock
purchases or redemptions, to the extent provided in the General
Corporation of Law of the State of Delaware; or
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a transaction from which a director or officer obtained an
improper personal benefit.
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Indemnification of directors. Our certificate
of incorporation provides that we must indemnify, advance
expenses to and hold harmless our directors to the fullest
extent permitted by the General Corporation Law of the State of
Delaware as it now exists or may be amended in the future. Under
current Delaware law, a corporation may indemnify directors made
or threatened to be made a party to any threatened, pending or
completed civil, criminal, administrative or investigative
action, suit or proceeding because of that persons service
as a director of the corporation or because that person was
serving at the corporations request as a director of
another corporation or enterprise. The corporation may indemnify
such a person for expenses (including attorneys fees),
judgments, fines and amounts paid in settlement that are
actually and reasonably incurred by the person in connection
with the action, suit or proceeding, provided that the person
acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and with respect to a criminal action or
proceeding, if the person had no reasonable cause to believe his
or her conduct was unlawful.
In each instance of indemnification, the corporation may only
indemnify the person following a determination that the person
met the applicable standard of conduct by:
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a majority vote of the directors who are not parties to the
action, suit or proceeding;
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a committee of the board of directors designated by a majority
vote of those disinterested directors;
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by independent legal counsel if there are no disinterested
directors or the disinterested directors so direct; or
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the stockholders.
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A corporation may pay expenses (including attorneys fees)
incurred by the director in defending an action, suit or
proceeding in advance of the final disposition of the action,
suit or proceeding upon receipt of an undertaking by the
director to repay the corporation the amount paid in advance if
it is ultimately determined that the person is not entitled to
be indemnified. The corporation shall be required to indemnify,
or
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advance expenses to, our directors in connection with a
proceeding commenced by our directors only if the board of
directors authorized the commencement of the proceeding.
Removal of Directors. Our directors may be
removed only for cause and only by a vote of the holders of a
majority of the total voting power of the shares entitled to
vote at an election of directors.
Board Vacancies. Only the board of directors
may fill vacancies on the board.
Delaware Law. Section 203 of the Delaware
General Corporation Law will prevent us from engaging in any
business combination with any interested
stockholder for a period of three years following the date
that the stockholder became an interested stockholder, unless
one of a number of statutory exceptions or exemptions applied.
Section 203 defines an interested stockholder
as an entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by such an
entity or person. The business combinations that
Section 203 prohibits with an interested stockholder are
the following transactions:
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any merger or consolidation involving us and an interested
stockholder;
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subject to certain exceptions, any transaction that results in
our issuance or transfer of any stock of our stock to an
interested stockholder; or
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any transaction involving us that has the effect of increasing
the proportionate share of the stock of any class or series of
the corporation beneficially owned by an interested stockholder.
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Although Section 203 would not prevent the interested
stockholder from transferring his shares, the limitations on
business combinations contained in Section 203 would,
absent board approval of the transfer, apply to any purchaser
and could thus potentially limit the ability of the interested
stockholder to sell his shares freely.
Certain
Anti-Takeover Effects
The classification of our board of directors and the lack of
cumulative voting will make it more difficult for our existing
stockholders to replace our board of directors as well as for
another party to obtain control of us by replacing our board of
directors. Since our board of directors has the power to retain
and discharge our officers, these provisions could also make it
more difficult for existing stockholders or another party to
change our management. In addition, the authorization of
undesignated preferred stock makes it possible for our board of
directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to
change our control.
These provisions may have the effect of deterring hostile
takeovers or delaying changes in our control or management.
These provisions are intended to enhance the likelihood of
continued stability in the composition of our board of directors
and in the policies they implement, and to discourage certain
types of transactions that may involve an actual or threatened
change of our control. These provisions are designed to reduce
our vulnerability to an unsolicited acquisition proposal. The
provisions also are intended to discourage certain tactics that
may be used in proxy fights. However, these provisions could
have the effect of discouraging others from making tender offers
for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result
from actual or rumored takeover attempts. These provisions may
also have the effect of preventing changes in our management.
Furthermore, following this offering, our board of directors may
implement certain additional measures that would discourage a
takeover of our company. These could include one or a
combination of the following, among others:
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adoption of a stockholder rights plan, commonly called a poison
pill.
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amending our bylaws, or proposing that our stockholders to amend
our certificate of incorporation or bylaws or adopt amendments
to our certificate of incorporation, with respect to the
following:
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increasing the vote required by our stockholders to amend our
certificate of incorporation or bylaws or to remove
directors, or
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increasing the vote required by our stockholders to consummate a
business combination if our board of directors does not
recommend it.
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Our board of directors can amend our by-laws without approval of
our stockholders. It can amend our certificate of incorporation
to create the type of preferred stock that is used for a poison
pill. It can also amend the terms of any preferred stock without
the approval of holders of the common stock. Other amendments to
our certificate of incorporation cannot be adopted unless our
stockholders approve them. Our board of directors will not adopt
or propose any amendment to our certificate of incorporation or
our by-laws of the type described above unless it determines
that the amendment is in the best interests of our stockholders.
These anti-takeover provisions may further permit our board of
directors to choose not to entertain offers to purchase us, even
offers that are at a substantial premium to the market price of
our stock. Our stockholders may therefore be deprived of
opportunities to profit from a sale of control.
After this offering, members of our senior management may enter
into an agreement providing that they will vote their shares in
accordance with the majority in interest of the total shares
held by the parties to the agreement. The agreement may have
other terms, such as a right of first refusal in the other
parties to the agreement if any party desires to sell his or her
shares of the company. The effect of this agreement may be to
concentrate a certain measure of control of our company in a
small group of executives.
Transfer
Agent and Registrar
Our independent stock transfer agent and registrar for our
common stock and warrants is
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SHARES
ELIGIBLE FOR FUTURE SALE
Before this offering, there has not been a public market for our
common stock. As described below, only a limited number of
shares outstanding before this offering will be available for
sale immediately after the offering due to contractual and legal
restrictions on resale. Nevertheless, future sales of
substantial amounts of our common stock, including shares issued
upon exercise of outstanding options, in the public market after
the restrictions lapse, or the possibility of such sales, could
cause the prevailing market price of our common stock to fall or
impair our ability to raise equity capital in the future.
Upon completion of this offering, we will have
outstanding shares
of our common stock, assuming the underwriters exercise their
over-allotment option in full. This also assumes that there are
no exercises of outstanding options, warrants or other rights to
acquire our stock. If all of the warrants are exercised
(excluding the representatives warrants described below),
we will
have shares
of common stock outstanding. All of the units sold in this
offering, and eventually the underlying shares and warrants, as
well as shares issued upon exercise of the warrants, will be
freely tradable in the public market without restriction or
further registration under the Securities Act, unless these
securities are held by our affiliates, as that term is defined
in Rule 144 under the Securities Act. Securities held or
purchased by our affiliates may not be resold except pursuant to
an effective registration statement or an exemption from
registration, including the safe harbor under Rule 144 of
the Securities Act described below.
After this offering, all of the shares of our common stock held
by our existing stockholders will be restricted
securities, as that term is defined in Rule 144 under
the Securities Act. Restricted securities may be sold in the
public market only pursuant to an effective registration
statement or an exemption from registration under Rule 144
or 701 under the Securities Act. These rules are summarized
below. Subject to the
69
lock-up
agreements described below and the provisions of Rule 144
and Rule 701, these restricted securities will be available
for sale in the public market as follows:
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Number of Shares
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Date of Availability for Sale
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Immediately upon completion of this offering
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90 days after the date of this prospectus and various
times thereafter
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One year after the date of this prospectus and various times
thereafter
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Lock-Up
Agreements
In connection with this offering, our officers, directors, and
greater than one percent stock and option holders, who together
hold an aggregate of 3,428,955 shares of our common stock and
options to purchase an additional 444,282 shares, have agreed,
subject to limited exceptions, not to sell directly or
indirectly or dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for
shares of common stock for a period of one year after the date
of this prospectus, and in specific circumstances, up to an
additional 34 days, without the prior written consent of C
K. Cooper & Company, Inc. For additional information,
see Underwriting.
Rule 144
In general, under Rule 144, beginning ninety days after the
date of this prospectus, a person who is not our affiliate and
has not been our affiliate at any time during the preceding
three months will be entitled to sell any shares of our common
stock that such person has held for at least six months,
including the holding period of any prior owner other than one
of our affiliates, without regard to volume limitations. Sales
of our common stock by any such person would be subject to the
availability of current public information about us if the
shares to be sold were held by such person for less than one
year.
In addition, under Rule 144, a person may sell immediately
upon the completion of this offering, shares of our common stock
acquired from us without regard to volume limitations or the
availability of public information about us, if:
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the person is not our affiliate and has not been our affiliate
at any time during the preceding three months; and
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the person has beneficially owned the shares to be sold for at
least one year, including the holding period of any prior owner
other than one of our affiliates.
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Subject to any applicable lock-up agreements, beginning ninety
days after the date of this prospectus, our affiliates who have
beneficially owned shares of our common stock for at least six
months, including the holding period of any prior owner other
than another of our affiliates, would be entitled to sell within
any three-month period those shares and any other shares they
have acquired that are not restricted securities, provided that
the aggregate number of shares sold does not exceed the greater
of:
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1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering, assuming no exercise of the
underwriters over-allotment option and no exercise of the
warrants being issued in connection with this offering; and
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the average weekly trading volume in our common stock on the
NYSE Amex during the four calendar weeks preceding the date of
filing of a Notice of Proposed Sale of Securities Pursuant to
Rule 144 with respect to the sale.
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Sales under Rule 144 by our affiliates are also subject to
provisions restricting how the shares can be sold, notice
requirements and to the availability of current public
information about us.
Representatives
Warrants
In connection with this offering, we have agreed to issue to the
representative of the underwriters warrants to purchase a total
of shares
of our common stock at a price per share equal to 120% of the
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initial offering price of the units. The representatives
warrants will be exercisable at any time beginning six months
after the date of this prospectus until the fifth anniversary of
the date of this prospectus. However, neither the
representatives warrants nor the underlying shares may be
sold, transferred, assigned, pledged or hypothecated, or be the
subject of any hedging, short sale, derivative, put or call
transaction that would result in the effective economic
disposition of the securities by any person for a period of six
months immediately following the date of effectiveness or
commencement of sales of this offering, except to any member
participating in the offering and the officers or partners
thereof, and only if all securities so transferred remain
subject to the six month
lock-up
restriction for the remainder of the
lock-up
period. The common stock issued to the representative upon
exercise of these representatives warrants will be freely
tradable.
Rule 701
Any employee, officer or director of our company, or consultant
to our company who purchased shares under a written compensatory
plan or contract may be entitled to sell them in reliance on
Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying
with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell
these shares in reliance on Rule 144 without complying with
the holding period, public information, volume limitation or
notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until ninety days
after the date of this prospectus before selling those shares.
However, 444,282 shares issuable upon the exercise of
options issued under Rule 701 are subject to
lock-up
agreements described above and will only become eligible for
sale when the one year
lock-up
agreements expire.
Registration
of Shares Issuable Stock Option Plan
We intend to file a Form
S-8
registration statement under the Securities Act after the
completion of this offering to register all 552,571 shares
of common stock issuable under our 2005 Stock Option Plan. The
registration statement will become effective immediately upon
filing, and shares covered by the registration statement will
thereupon be eligible for sale in the public market, subject to
any lock-up
agreements and Rule 144 limitations applicable to
affiliates.
71
UNDERWRITING
Subject to the terms and conditions described in an underwriting
agreement between us and C. K. Cooper & Company, Inc.,
as representative and book-running manager, we have agreed to
sell to the underwriters, and the underwriters have severally
agreed to purchase from us, the following number of units at the
offering price less the underwriting discount set forth on the
cover page of this prospectus.
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Underwriter
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Number of Units
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C. K. Cooper & Company, Inc.
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The underwriters have agreed to purchase all of the units sold
under the underwriting agreement if any of the units are
purchased, other than units covered by the over-allotment option
described below. The underwriting agreement provides that the
underwriters obligation to purchase units depends on the
satisfaction of the conditions contained in the underwriting
agreement including:
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the obligation to purchase all of the units offered hereby
(other than those units covered by their option to purchase
additional units as described below), if any of the units are
purchased;
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the representations and warranties made by us to the
underwriters are true;
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there is no material change in our business or the financial
markets; and
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we deliver customary closing documents to the underwriters.
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We have granted the underwriters an option exercisable for
30 days from the date of the underwriting agreement to
purchase a total of up
to
additional units at the public offering price less the
underwriting discount. The underwriters may exercise this option
solely to cover any over-allotments, if any, made in connection
with this offering. To the extent the underwriters exercise this
option in whole or in part, each will be obligated, subject to
conditions contained in the underwriting agreement, to purchase
a number of additional units approximately proportionate to that
underwriters initial commitment amount reflected in the
above table.
The underwriters have advised us that they propose initially to
offer the units to the public at the public offering price on
the cover page of this prospectus and to dealers at that price
less a concession not in excess of
$ per unit. After the offering,
the offering price and other selling terms may be changed.
The following table shows the per unit and total underwriting
discounts and commissions to be paid to the underwriters by us.
The information assumes either no exercise or full exercise by
the underwriters of their over-allotment option.
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Without Option
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With Option
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Per Unit
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$
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$
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Total
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$
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$
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The expenses of this offering that are payable by us, excluding
the underwriting discount and commissions and related fees, are
estimated to be approximately $ .
We have agreed to reimburse the underwriters for their out of
pocket expenses in connection with this offering, including
their attorneys fees. In addition, in October 2009, we
paid C.K. Cooper & Company, Inc. an aggregate of
$25,000 for advisory services rendered to us in preparation for
this offering.
In connection with this offering, we have agreed to issue to
C.K. Cooper & Company, Inc. warrants entitling it or
its assigns, to purchase up to an aggregate of 10% of the total
number of shares sold in this offering at a price equal to 120%
of the public offering price per share. These warrants will be
exercisable beginning six months after the date of this
prospectus until the fifth anniversary of that date and will
contain customary exercise provisions, representations and
anti-dilution provisions. The warrants may be exercised for cash
or on a cashless exercise basis. For the complete terms of the
representatives warrants, you should refer to the form of
representative warrant filed as an exhibit to the registration
statement of which this prospectus is a part.
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The warrants to be issued to C.K. Cooper & Company are
deemed compensation by the Financial Industry Regulatory
Authority, Inc., or FINRA, and may not be sold, transferred,
pledged, hypothecated or assigned or be the subject of any
hedging, short sale, derivative, put or call transaction that
would result in the effective economic disposition of the
securities by any person for a period of
180-days
following the effective date of the offering pursuant to
Rule 2710(g)(1) of the NASD Conduct Rules.
In addition, the underwriting agreement also grants C. K.
Cooper & Company a right of first refusal to act as
lead underwriter for any equity or debt offerings we contemplate
during the period of 36 months from the closing of this
offering.
We have engaged C. K. Cooper & Company, on a
non-exclusive basis, as our agent for the solicitation of the
exercise of the warrants. To the extent not inconsistent with
the guidelines of FINRA and the rules and regulations of the
SEC, we have agreed to pay C. K. Cooper & Company for
bona fide services rendered a commission equal to 5% of the
exercise price for each warrant exercised more than one year
after the date of this prospectus if the exercise was solicited
by C. K. Cooper & Company. No compensation will be
paid to C. K. Cooper & Company upon the exercise of
the warrants if:
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the market price of the underlying shares of common stock is
lower than the exercise price;
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the holder of the warrants has not confirmed in writing that C.
K. Cooper & Company solicited his, her or its exercise;
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the warrants are held in a discretionary account, unless prior
specific written approval for the exercise is received from the
holder;
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the warrants are exercised in an unsolicited transaction; or
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the arrangement to pay the commission is not disclosed in the
prospectus provided to warrant holders at the time of exercise.
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We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in respect of those liabilities.
We, all of our directors and executive officers and
substantially all of the holders of our outstanding stock have
agreed that, without the prior written consent of C. K.
Cooper & Company, we will not directly or indirectly,
(1) offer for sale, sell, pledge, or otherwise dispose of
(or enter into any transaction or device that is designed to, or
could be expected to, result in the disposition by any person at
any time in the future of) any shares of common stock
(including, without limitation, shares of common stock that may
be deemed to be beneficially owned by us or them in accordance
with the rules and regulations of the SEC and shares of common
stock that may be issued upon exercise of any options or
warrants) or securities convertible into or exercisable or
exchangeable for common stock, (2) enter into any swap or
other derivatives transaction that transfers to another, in
whole or in part, any of the economic consequences of ownership
of the common stock, (3) make any demand for or exercise
any right or file or cause to be filed a registration statement,
including any amendments thereto, with respect to the
registration of any shares of common stock or securities
convertible, exercisable or exchangeable into common stock or
any of our other securities, or (4) publicly disclose the
intention to do any of the foregoing for a period of one year
after the date of this prospectus.
The one year restricted period described in the preceding
paragraph will be extended if:
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during the last 17 days of the one year restricted period
we issue an earnings release or material news or a material
event relating to us occurs; or
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prior to the expiration of the one year restricted period, we
announce that we will release earnings results during the
16-day
period beginning on the last day of the one year period, in
which case the restrictions described in the preceding paragraph
will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or occurrence of a material
event, unless such extension is waived in writing by C. K.
Cooper & Company.
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C. K. Cooper & Company, in its sole discretion,
may release the common stock and other securities subject to the
lock-up
agreements described above in whole or in part at any time with
or without notice. When determining whether or not to release
common stock and other securities from
lock-up
agreements, C. K. Cooper & Company will consider,
among other factors, the holders reasons for requesting
the release, the number of shares of common stock and other
securities for which the release is being requested and market
conditions at the time.
We intend to apply to list the securities we are offering in
this prospectus on the NYSE Amex as follows:
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Security
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Symbol
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Units
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PBFCU
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Common Stock
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PBFC
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Warrants
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PBFCW
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A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters, or by their affiliates. Other
than any prospectus made available in electronic format in this
manner, the information on any web site containing the
prospectus is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been
approved or endorsed by us or any underwriter in such capacity
and should not be relied on by prospective investors.
In connection with this offering, some participants in the
offering may purchase and sell our securities in the open
market. These transactions may include short sales, syndicate
covering transactions and stabilizing transactions. Short sales
involve sales by the underwriters of securities in excess of the
number of securities required to be purchased by the
underwriters in the offering, which creates a syndicate short
position. Covered short sales are sales of
securities made in an amount up to the number of securities
represented by the underwriters over-allotment option.
Transactions to close out the covered syndicate short position
involve either purchases of securities in the open market after
the distribution has been completed or the exercise of the
over-allotment option. In determining the source of securities
to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of
securities available for purchase in the open market as compared
to the price at which they may purchase securities through the
over-allotment option. Stabilizing transactions consist of bids
for or purchases of securities in the open market while the
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from an
underwriter or syndicate member when the underwriters repurchase
shares originally sold by that underwriter or syndicate member
in order to cover syndicate short positions or make stabilizing
purchases.
Any of these activities may have the effect of raising or
maintaining the market price of our securities or preventing or
retarding a decline in the market price of our securities. As a
result, the price of our securities may be higher than the price
that might otherwise exist in the open market. The underwriters
may conduct these transactions on the NYSE Amex or otherwise. If
the underwriters commence any of these transactions, they may
discontinue them at any time.
The underwriters may in the future perform investment banking
and advisory services for us from time to time for which it may
in the future receive customary fees and expenses.
INTERESTS
OF CERTAIN PERSONS IN THE OFFERING
If this offering is not successful, we may not have the funds
necessary to pay the expenses of the offering in the immediate
future, including fees of our legal counsel, Fishman Haygood
Phelps Walmsley Willis & Swanson, L.L.P., and fees of
our independent registered public accounting firm,
Postlethwaite & Netterville, APAC.
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LEGAL
MATTERS
Fishman Haygood Phelps Walmsley Willis & Swanson,
L.L.P., New Orleans, Louisiana and Richards, Layton &
Finger, P.A., Wilmington, Delaware, will pass upon certain legal
matters for us in connection with the offered securities.
Certain legal matters will be passed upon for C. K.
Cooper & Company by K&L Gates LLP, Irvine,
California.
EXPERTS
The consolidated financial statements of Planet Beach
Franchising Corporation and subsidiaries as of December 31,
2009 and 2008, and for each of the years in the three-year
period ended December 31, 2009, have been included herein
and in the registration statement in reliance upon the reports
of Postlethwaite & Netterville, APAC, independent
registered public accounting firm appearing elsewhere herein and
in the registration statement, upon the authority of said firm
as experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the securities we are
offering in this prospectus. This prospectus does not contain
all of the information set forth in the registration statement
or the exhibits and schedules filed with it. You should refer to
the registration statement and its exhibits and schedules for
additional information. When we make references in this
prospectus to any of our agreements or other documents, the
references are not necessarily complete and you should refer to
the exhibits filed with the registration statement for copies of
the actual agreements or other documents.
You can read and copy the registration statement and the
exhibits at prescribed rates at the SECs Public Reference
Room at 100 F Street, N.E., Washington, D.C.
20549, on official business days during the hours of
10 a.m. to 3 p.m. You may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Our SEC filings, including the registration statement and the
exhibits filed with the registration statement, are also
available from the SECs website at www.sec.gov,
which contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC.
We will provide a copy of our annual report to stockholders,
including our audited financial statements, at no charge upon
written request sent to Planet Beach Franchising Corporation,
5145 Taravella Road, Marrero, Louisiana, 70072. Our address on
the World Wide Web is www.planetbeach.com. The
information on our website is not a part of this prospectus.
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INDEX TO
FINANCIAL STATEMENTS
The financial statements listed below do not give effect to the
1 for 3.5 reverse stock split we effected on March 18, 2010.
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CONSOLIDATED FINANCIAL STATEMENTS
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F-2
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F-3
|
|
For each of the three years in the period ended December 31,
2009:
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Planet Beach Franchising Corporation and Subsidiaries
Marrero, Louisiana:
We have audited the accompanying consolidated balance sheets of
Planet Beach Franchising Corporation and Subsidiaries (the
Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders
equity, and cash flows for each of the years in the three-year
period ended December 31, 2009. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 consolidated
financial position of the Company as of December 31, 2009
and 2008, and the consolidated results of their operations and
their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles.
/s/ POSTLETHWAITE &
NETTERVILLE, APAC
Metairie, Louisiana
April 1, 2010
F-2
PLANET
BEACH FRANCHISING CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
53,810
|
|
|
$
|
60,068
|
|
Investments
|
|
|
|
|
|
|
288,614
|
|
Accounts receivable, net of allowance for doubtful accounts of
$733,518
and $606,867, respectively
|
|
|
1,032,632
|
|
|
|
1,346,784
|
|
Due from employees
|
|
|
42,064
|
|
|
|
79,398
|
|
Inventory
|
|
|
479,264
|
|
|
|
727,116
|
|
Notes receivable
|
|
|
228,569
|
|
|
|
354,384
|
|
Prepaid expenses and other current assets
|
|
|
89,657
|
|
|
|
87,813
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,925,996
|
|
|
|
2,944,177
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
2,188,732
|
|
|
|
2,171,045
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Notes receivable, net of allowance for doubtful accounts of
$518,805
and $279,682, respectively
|
|
|
707,365
|
|
|
|
759,657
|
|
Other long-term assets
|
|
|
111,519
|
|
|
|
91,118
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
818,884
|
|
|
|
850,775
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,933,612
|
|
|
$
|
5,965,997
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Current maturities of notes payable
|
|
$
|
448,742
|
|
|
$
|
452,063
|
|
Line of credit
|
|
|
|
|
|
|
192,561
|
|
Accounts payable
|
|
|
1,402,437
|
|
|
|
2,090,655
|
|
Customers deposits
|
|
|
264,633
|
|
|
|
142,671
|
|
Accrued liabilities
|
|
|
459,951
|
|
|
|
448,964
|
|
Deferred revenue
|
|
|
55,500
|
|
|
|
234,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,631,263
|
|
|
|
3,560,914
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
2,773,919
|
|
|
|
2,670,179
|
|
Accrued liabilities
|
|
|
620,224
|
|
|
|
448,261
|
|
Deferred revenue
|
|
|
213,181
|
|
|
|
220,682
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
3,607,324
|
|
|
|
3,339,122
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,238,587
|
|
|
|
6,900,036
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value;
|
|
|
|
|
|
|
|
|
Shares authorized: 100,000,000; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value;
|
|
|
|
|
|
|
|
|
Shares authorized: 100,000,000;
|
|
|
|
|
|
|
|
|
Shares issued: 13,428,139;
|
|
|
|
|
|
|
|
|
Shares outstanding: 12,998,739
|
|
|
1,343
|
|
|
|
1,343
|
|
Additional paid-in capital
|
|
|
348,802
|
|
|
|
230,869
|
|
Retained earnings (deficit)
|
|
|
(1,480,120
|
)
|
|
|
(771,728
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
(219,523
|
)
|
Treasury stock, at cost
|
|
|
(175,000
|
)
|
|
|
(175,000
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(1,304,975
|
)
|
|
|
(934,039
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS
|
|
|
|
|
|
|
|
|
EQUITY (DEFICIT)
|
|
$
|
4,933,612
|
|
|
$
|
5,965,997
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-3
PLANET
BEACH FRANCHISING CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2009, 2008, AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of spa equipment and products
|
|
$
|
4,919,466
|
|
|
$
|
14,705,685
|
|
|
$
|
17,585,785
|
|
Franchise fees
|
|
|
1,257,067
|
|
|
|
3,067,123
|
|
|
|
2,745,360
|
|
Royalties and related fees
|
|
|
6,883,254
|
|
|
|
6,833,193
|
|
|
|
5,584,958
|
|
Other
|
|
|
209,333
|
|
|
|
399,831
|
|
|
|
539,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
13,269,120
|
|
|
|
25,005,832
|
|
|
|
26,456,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,692,991
|
|
|
|
11,131,834
|
|
|
|
13,369,056
|
|
Operating expenses
|
|
|
3,951,089
|
|
|
|
5,630,367
|
|
|
|
4,632,521
|
|
Salaries and bonuses
|
|
|
4,279,981
|
|
|
|
6,790,704
|
|
|
|
6,633,646
|
|
Commissions
|
|
|
1,579,631
|
|
|
|
2,013,114
|
|
|
|
2,012,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
13,503,692
|
|
|
|
25,566,019
|
|
|
|
26,647,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(234,572
|
)
|
|
|
(560,187
|
)
|
|
|
(191,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
34,871
|
|
|
|
12,818
|
|
|
|
12,595
|
|
Interest expense
|
|
|
(256,172
|
)
|
|
|
(218,575
|
)
|
|
|
(174,204
|
)
|
Realized gain (loss) on investments
|
|
|
(252,519
|
)
|
|
|
7,697
|
|
|
|
23,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(473,820
|
)
|
|
|
(198,060
|
)
|
|
|
(137,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION
FOR INCOME TAXES
|
|
|
(708,392
|
)
|
|
|
(758,247
|
)
|
|
|
(329,753
|
)
|
Benefit for income tax
|
|
|
|
|
|
|
|
|
|
|
(4,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(708,392
|
)
|
|
$
|
(758,247
|
)
|
|
$
|
(325,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE
BASIC AND DILUTED
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
SHARES OUTSTANDING
BASIC AND DILUTED
|
|
|
12,998,739
|
|
|
|
12,971,046
|
|
|
|
12,961,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-4
PLANET
BEACH FRANCHISING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(DEFICIT)
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
BALANCE, January 1, 2007
|
|
|
12,381,215
|
|
|
$
|
1,238
|
|
|
$
|
141,302
|
|
|
$
|
319,676
|
|
|
$
|
37,461
|
|
|
|
415,000
|
|
|
$
|
(157,500
|
)
|
|
$
|
342,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(325,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(325,102
|
)
|
Net unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,068
|
)
|
|
|
|
|
|
|
|
|
|
|
(34,068
|
)
|
Foreign currency translation adjustment, net of tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(357,674
|
)
|
Stock issuance
|
|
|
1,010,000
|
|
|
|
101
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,010
|
|
Stock options compensation
|
|
|
|
|
|
|
|
|
|
|
16,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,970
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,055
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,400
|
|
|
|
(17,500
|
)
|
|
|
(17,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2007
|
|
|
13,391,215
|
|
|
|
1,339
|
|
|
|
159,181
|
|
|
|
(13,481
|
)
|
|
|
4,889
|
|
|
|
429,400
|
|
|
|
(175,000
|
)
|
|
|
(23,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(758,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(758,247
|
)
|
Net unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223,606
|
)
|
|
|
|
|
|
|
|
|
|
|
(223,606
|
)
|
Foreign currency translation adjustment, net of tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(806
|
)
|
|
|
|
|
|
|
|
|
|
|
(806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(982,659
|
)
|
Stock options compensation
|
|
|
|
|
|
|
|
|
|
|
34,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,769
|
|
Stock issuance
|
|
|
36,924
|
|
|
|
4
|
|
|
|
36,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008
|
|
|
13,428,139
|
|
|
|
1,343
|
|
|
|
230,869
|
|
|
|
(771,728
|
)
|
|
|
(219,523
|
)
|
|
|
429,400
|
|
|
|
(175,000
|
)
|
|
|
(934,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(708,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(708,392
|
)
|
Net realized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,822
|
|
|
|
|
|
|
|
|
|
|
|
219,822
|
|
Foreign currency translation adjustment, net of tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(488,869
|
)
|
Stock options compensation
|
|
|
|
|
|
|
|
|
|
|
117,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009
|
|
|
13,428,139
|
|
|
$
|
1,343
|
|
|
$
|
348,802
|
|
|
$
|
(1,480,120
|
)
|
|
$
|
|
|
|
|
429,400
|
|
|
$
|
(175,000
|
)
|
|
$
|
(1,304,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-5
PLANET
BEACH FRANCHISING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(708,392
|
)
|
|
$
|
(758,247
|
)
|
|
$
|
(325,102
|
)
|
Adjustments to reconcile net loss to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
198,399
|
|
|
|
220,372
|
|
|
|
203,951
|
|
Bad debt expense and inventory allowance
|
|
|
590,124
|
|
|
|
505,652
|
|
|
|
129,430
|
|
Stock options compensation expense
|
|
|
117,933
|
|
|
|
34,769
|
|
|
|
16,970
|
|
Realized loss (gain) on investments
|
|
|
252,519
|
|
|
|
(7,697
|
)
|
|
|
(23,751
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred benefit expense
|
|
|
|
|
|
|
|
|
|
|
(4,651
|
)
|
National advertising deposits
|
|
|
|
|
|
|
(386,356
|
)
|
|
|
158,832
|
|
Accounts receivable
|
|
|
(79,512
|
)
|
|
|
(318,999
|
)
|
|
|
(130,529
|
)
|
Other current assets
|
|
|
11,489
|
|
|
|
(90,241
|
)
|
|
|
(23,339
|
)
|
Inventory
|
|
|
164,852
|
|
|
|
549,585
|
|
|
|
(180,194
|
)
|
Accounts payable
|
|
|
(569,761
|
)
|
|
|
1,411,076
|
|
|
|
200,038
|
|
Customers deposits
|
|
|
121,962
|
|
|
|
(922,351
|
)
|
|
|
108,370
|
|
Deferred revenue
|
|
|
(186,002
|
)
|
|
|
(500
|
)
|
|
|
(24,442
|
)
|
Accrued liabilities
|
|
|
152,882
|
|
|
|
27,842
|
|
|
|
(47,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
66,493
|
|
|
|
264,905
|
|
|
|
58,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition of property, plant and equipment
|
|
|
(132,845
|
)
|
|
|
(148,115
|
)
|
|
|
(287,307
|
)
|
Decrease in investments
|
|
|
255,618
|
|
|
|
7,697
|
|
|
|
68,375
|
|
Decrease (increase) in notes receivable, net
|
|
|
17,648
|
|
|
|
(717,483
|
)
|
|
|
48,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
140,421
|
|
|
|
(857,901
|
)
|
|
|
(170,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in line of credit
|
|
|
(192,561
|
)
|
|
|
(51,346
|
)
|
|
|
67,659
|
|
Proceeds from long-term debt
|
|
|
363,345
|
|
|
|
59,476
|
|
|
|
498,978
|
|
Payments on long-term debt
|
|
|
(383,956
|
)
|
|
|
(300,999
|
)
|
|
|
(133,617
|
)
|
Payments on capital lease
|
|
|
|
|
|
|
|
|
|
|
(29,028
|
)
|
Common stock issuance
|
|
|
|
|
|
|
36,923
|
|
|
|
1,010
|
|
Payment of dividends
|
|
|
|
|
|
|
|
|
|
|
(8,055
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(17,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(213,172
|
)
|
|
|
(255,946
|
)
|
|
|
379,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
(6,258
|
)
|
|
|
(848,942
|
)
|
|
|
267,313
|
|
CASH AND CASH EQUIVALENTS BEGINNING OF
YEAR
|
|
|
60,068
|
|
|
|
909,010
|
|
|
|
641,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS END OF YEAR
|
|
$
|
53,810
|
|
|
$
|
60,068
|
|
|
$
|
909,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
215,436
|
|
|
$
|
213,303
|
|
|
$
|
167,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
8,497
|
|
|
$
|
5,980
|
|
|
$
|
46,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
property, plant & equipment acquired
|
|
$
|
254,698
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Area developer fee financed
|
|
$
|
310,608
|
|
|
$
|
377,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
F-6
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Organization
Planet Beach Franchising Corporation (the Company) was initially
incorporated on September 26, 1996, under the laws of the
State of Louisiana. On March 25, 2008, the Company
reincorporated under the laws of the State of Nevada. In
conjunction with the reincorporation, authorized common stock
was increased from 15 million to 100 million shares,
and the par value decreased from $0.001 to $0.0001 per common
share. In addition, 10 million shares of preferred stock
having a par value of $0.0001 per share were authorized for
issuance. Currently, the Company is engaged in the business of
selling Planet Beach Contempo Spa franchises throughout the
United States, Canada, Ireland, South Africa, and Australia. In
addition, the Company has locations under development in Egypt,
Saudi Arabia and Kuwait. The Company also sells spa equipment
and products to new and existing franchisees.
The Company has two wholly-owned subsidiaries, Planet Beach Real
Estate, LLC (PBRE) and Planet Beach International, LLC (PBI).
PBRE has been largely inactive since 2005. PBI was established
to recruit master franchisors in international locations under
long-term contractual arrangements; whereby, the master
franchisor would be given the right to sell Planet Beach
Contempo Spa Franchises within the designed international
region. Master franchisors would pay an initial master franchise
fee upon entering the agreement. The master franchisor would
also remit to the Company a percentage of the license fee,
product and equipment sales, and royalties collected from the
international franchise locations.
The Company has incurred losses of approximately $708,000,
$758,000 and $325,000 for its years ended December 31,
2009, 2008 and 2007, respectively. The losses have occurred due
to the global economic downturn that began in 2007. The Company
and the franchisees have been impacted by an impaired ability to
obtain credit on reasonable terms or at all. Decreased access to
credit for franchisees has impaired their ability to meet their
obligations when due and led to franchisee bankruptcies. A
continued recession will have a negative impact on the
Companys financial position.
Management believes that the Company will continue to operate as
a going concern by reducing operating and salary costs and
improving operating profitability, controlling inventory levels,
working with vendors and other creditors to accept more
favorable payment terms and through seeking additional capital
for the Companys operations.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash in banks and cash held
in escrow accounts. The Company considers all highly liquid
investments with an original maturity of three months or less to
be cash equivalents.
F-7
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain states require the initial franchise fee be deposited in
escrow until the franchisee commences business. Once the
location commences business, the state will release the funds.
Until funds are released, the revenue for the franchise sale is
deferred. At December 31, 2009 and 2008, funds held in
escrow totaled $30,020 and $0, respectively.
Accounts
Receivable
Accounts receivable consist primarily of amounts due for
franchise royalties and product sales, which are carried at
original invoice amount less an estimate made for doubtful
receivables based on a review of all outstanding amounts.
Management determines the allowance for doubtful accounts by
identifying overdue accounts and by reserving a percentage of
the accounts outstanding balance as uncollectible based on
historical experience with collections in general or based on
the accounts specific circumstance. Accounts receivables
are written off when deemed uncollectible. Recoveries of
accounts receivables previously written off are recorded when
received.
Inventory
The Companys inventory consists of spa and tanning lotions
and promotional clothing. Inventory is valued at the lower of
cost or market, computed on the
first-in,
first-out basis.
Investments
At December 31, 2008 investments consist primarily of
mutual funds held at a national brokerage firm, are classified
as
available-for-sale,
and carried at fair market value, unrealized gains and losses,
net of tax, are included in the determination of comprehensive
income (loss) and reported in shareholders equity
(deficit).
Property,
Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
on plant and equipment is calculated using the straight line
method over the estimated useful lives of the related assets.
Maintenance and repairs are charged to expenses as incurred.
Improvements and renewals are capitalized and depreciated over
the remaining estimated useful life. When property, plant, and
equipment are sold or otherwise disposed of, the asset account
and related accumulated depreciation are relieved, and any gain
or loss is included in income.
The useful lives of property, plant, and equipment for purposes
of computing depreciation are:
|
|
|
Buildings and leasehold improvements
|
|
7 39 Years
|
Spa equipment
|
|
7 Years
|
Computer equipment
|
|
3 5 Years
|
Furniture, fixtures, and equipment
|
|
3 7 Years
|
Software
|
|
5 Years
|
Long-Lived
Assets
Long-lived assets, such as property, plant, and equipment, and
purchased intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If circumstances require a long-lived asset
or asset group be tested for possible impairment, the Company
first compares undiscounted cash flows expected to be generated
by that asset or asset group to its carrying value. If the
carrying value of the long-lived asset or
F-8
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
asset group is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the
carrying value exceeds its fair value. Fair value is determined
through various valuation techniques including discounted cash
flow models, quoted market values and third-party independent
appraisals, as considered necessary.
Fair
Value of Financial Instruments
For purposes of financial reporting, management has determined
that the fair value of financial instruments including cash and
cash equivalents, accounts and notes receivable, accounts
payable, accrued liabilities and notes payable, approximate the
carrying value.
Notes
Receivable
Notes receivable consists principally of area developer fees,
equipment vendor receivables, and spa purchase fees financed by
the Company. The allowance for doubtful accounts is the
Companys best estimate of the amount of credit losses in
the Companys existing notes. The allowance is determined
on an individual note basis upon review of any note that has a
payment past due for over 60 days. A note is considered
impaired if it is probable that the Company will not collect all
principal and interest contractually due. The impairment is
measured based on the present value of expected future cash
flows discounted at the notes effective interest rate.
The Company does not accrue interest when a note is considered
impaired. When ultimate collectability of the principal balance
if the impaired note is in doubt, all cash receipts on impaired
notes are applied to reduce the principal amount of such notes
until the principal has been recovered and are recognized as
interest income thereafter. Impairment losses are charged
against the allowance and increases in the allowance are charged
to bad debt expense. Notes are written off against the allowance
when all possible means of collection have been exhausted and
the potential for recovery is considered remote.
The notes have interest rates ranging from non-interest bearing
to 7.0 percent and will mature upon sale of related
franchises, or in accordance with scheduled maturities through
September 2016.
Other
long-term assets
Other long-term assets primarily consist of cost incurred in
anticipation of an initial public offering of the Companys
common stock, trademarks related to the Companys business
and deposits.
Customers
Deposits
Customers deposits represent advances from franchisees for
the purchase of spa and tanning equipment. Equipment orders are
normally shipped within 2-4 weeks of receipt of funds.
Advance payment is required for all equipment purchases.
National
Advertising and Brand Development
The Company collects National Advertising and Brand development
royalty from its franchisees. Franchises that were established
before April 1, 2008 are required to contribute 1% of gross
sales to the National Advertising Fund as a royalty for the
development and distribution of national marketing efforts for
the benefit of all franchisees within the Planet Beach system.
The Company carries forward national advertising royalties that
are not spent in the fiscal year collected to the following
year, and records them as a deposit on the consolidated balance
sheet. At December 31, 2009 and 2008, there were no carry
forward deposits. The Company recognizes national advertising
expenditures in the consolidated statements of operations as
incurred.
F-9
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Beginning April 1, 2008, franchisees entering the system
must contribute 2% of gross sales for brand development. The
Company has no obligation to carry forward any unspent brand
development royalties for these franchisees to the following
year. The Company recognizes brand development royalties in our
consolidated statements of income in full as we accrue them,
along with the brand development expenses.
Revenue
Recognition
The Company has entered into franchise agreements that grant
franchisees the right to operate individual Planet Beach
Contempo Spas in return for an initial franchise fee and ongoing
development fees (royalties). In addition, the Company has
entered into area developer agreements, including international
master franchisor agreements, which grant area developers the
right to sell individual Planet Beach Contempo Spas in
designated territories.
The Company recognizes revenue from individual franchise sales
when all material services or conditions relating to the sale
have been substantially performed or satisfied by the Company.
Area developer fees, which include international master
franchise fees, are recognized as revenue on the cash basis
until 50% of the purchase price is collected; the uncollected
purchase price is deferred. All payments received for these area
agreements are non-refundable. The Company estimates that once
50% of the purchase price has been collected, and no further
significant obligations remain, it is probable that the
remaining area development fee will be collectible. Therefore,
the Company fully recognizes area development fees once 50% of
the purchase price is collected.
Most of these area agreements have promissory notes structured
requiring payment of at least 50% of the purchase price within
12 months of agreement execution. The remaining purchase
price will normally be collected over 3-6 years amortized
monthly with principle and interest payments.
All payments received for these area agreements are
non-refundable.
The Company accrues royalties based upon the contractual royalty
rate, currently 6% of total franchise revenue, as defined in the
respective franchise agreements. Royalties are recorded as
revenue when the related franchise revenue is reported to the
Company. Sales of spa equipment and products are recognized as
revenue, when the items are shipped collection is probable, and
no further significant obligations remain.
Advertising
and Marketing Costs
The Company expenses advertising and marketing costs as
incurred. Advertising and marketing expense incurred by the
Company during 2009, 2008 and 2007 amounted to $63,179,
$306,422, and $342,832, respectively.
Shipping
Expense
The Company provides free shipping for product orders to
customers ordering minimum amounts. Shipping expense is included
with operating expenses on the consolidated statement of
operations and totaled $209,482, $337,525, and $293,833 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Foreign
Currency Translation
Foreign currency translation relates to the differences from
historical exchange rates and are reflected in
Shareholders Equity (Deficit) as part of accumulated other
comprehensive income (loss). These adjustments were primarily
related to a few Canadian transactions.
F-10
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Tax
The Company accounts for income taxes under the liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. We include any estimated interest and
penalties on tax related matters in income taxes payable.
Valuation allowances are established when necessary to reduce
net deferred income tax assets to the amount expected to be
realized. (See Note 6)
Effective January 1, 2009, the Company recognized the
effect of income tax positions only if those positions are more
likely than not being sustained. Recognized income tax positions
are measured at the largest amount that is greater than 50%
likely of being realized. Changes in recognition or measurement
are reflected in the period in which the change in judgment
occurs. Prior to the adoption of ASC 740-10 Income Tax
Uncertainties, the Company recognized the effect of income tax
positions only if such positions were probable of being
sustained. The effect of the adoption of this standard was not
material.
The Company records interest related to unrecognized tax
benefits in interest expense and penalties in selling, general,
and administrative expenses.
Stock-Based
Compensation
The Company accounts for its stock-based compensation using the
modified prospective adjustment method of measuring share based
payments (see Note 7).
Earnings
(loss) per Share
Basic earnings (loss) per share is computed by dividing income
(loss) available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is computed in the same manner as basic
earnings per share except that the denominator is increased to
include the number of additional common shares that could have
been outstanding assuming the exercise of stock options and the
potential shares that would have a dilutive effect on earnings
per share.
Stock options of approximately 1,794,000, 1,864,000 and
521,000 shares were excluded in the computation of diluted
earnings per share for the years ended December 31, 2009,
2008 and 2007, respectively, as the effect would have been
anti-dilutive due to the loss recorded for the years then ended.
Effect
of New Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance for the
FASB accounting standards codification (Codification) and the
hierarchy of generally accepted accounting principles
(U.S. GAAP). The guidance establishes the Codification to
become the source of authoritative U.S. GAAP recognized by
the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. The
guidance and the Codification are effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted the provisions of
the guidance, as required, and determined that the impact to the
Companys financial condition or results of operations was
immaterial.
F-11
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2009, the FASB issued new accounting guidance which
requires additional information regarding transfers of financial
assets, including securitization transactions, and where
companies have continuing exposure to the risks related to
transferred financial assets. The guidance eliminates the
concept of a qualifying special-purpose entity,
changes the requirements for derecognizing financial assets, and
requires additional disclosures. The guidance will be effective
for the Company on January 1, 2010. The Company is
currently evaluating the impact that the guidance will have on
its financial condition and results of operations.
In June 2009, the FASB issued new accounting guidance which
modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The guidance
clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other
things, an entitys purpose and design and a companys
ability to direct the activities of the entity that most
significantly impact the entitys economic performance. The
guidance requires an ongoing reassessment of whether a company
is the primary beneficiary of a variable interest entity. The
guidance also requires additional disclosures about a
companys involvement in variable interest entities and any
significant changes in risk exposure due to that involvement.
The guidance will be effective for the Company on
January 1, 2010. The Company is currently evaluating the
impact that the guidance will have on its financial condition
and results of operations.
The FASB issued an update that all entities are required to make
disclosures about recurring and nonrecurring fair value
measurements under Fair Value Measurements. The guidance
requires certain new disclosures and clarifies two existing
disclosure requirements. The new disclosures and clarifications
of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years.
The Company does not believe that any other recently issued, but
not yet effective, accounting standards will have a significant
effect on its consolidated financial condition or results of
operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current years presentation.
|
|
3.
|
Property,
Plant and Equipment
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
210,000
|
|
|
$
|
210,000
|
|
Building and leasehold improvements
|
|
|
1,706,015
|
|
|
|
1,556,015
|
|
Spa equipment
|
|
|
516,794
|
|
|
|
384,133
|
|
Computer equipment
|
|
|
623,391
|
|
|
|
619,832
|
|
Furniture, fixtures and equipment
|
|
|
164,042
|
|
|
|
162,719
|
|
Software
|
|
|
554,560
|
|
|
|
626,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,774,802
|
|
|
|
3,558,716
|
|
Less: accumulated depreciation
|
|
|
(1,586,070
|
)
|
|
|
(1,387,671
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2,188,732
|
|
|
$
|
2,171,045
|
|
|
|
|
|
|
|
|
|
|
F-12
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation expense associated with property, plant and
equipment charged to operations during 2009, 2008 and 2007
totaled $198,399, $220,372, and $203,951 respectively.
Substantially all of the Companys building and building
improvements are pledged as collateral for various loans of the
Company. (See Note 5)
One of the Companys buildings is subject to a lien filed
by of $30,361 for unpaid taxes.
In 2006, the Company obtained a portfolio credit line which is
held by the Companys investment broker. The Company had
outstanding balances on lines of credit of $0 and $192,561 at
December 31, 2009 and 2008, respectively, secured by the
Companys investments which are held with the
Companys investment broker. Interest is paid monthly at
rates ranging from 8.00% to 3.25% for 2008; and 8.50% to 10.50%
for 2007. Total amounts available on lines of credit at
December 31, 2009 and 2008 were $0 and $9,469,
respectively. The line of credit was terminated during 2009 as
the related investment portfolio was liquidated.
F-13
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
5. Long-Term
Debt
The following is a summary of the Companys long-term debt
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Note Payable Company, payable in monthly
installments of $6,837, including interest of 6.54%, through
March 2027, secured by building; guaranteed by certain Company
officers and shareholders.
|
|
$
|
840,008
|
|
|
$
|
866,108
|
|
Note Payable Company, payable in monthly
installments of $9,170, including interest of 8.25%, through
June 2012, with final payment estimated to be $459,755 on
July 19, 2012, secured by accounts receivable and
inventory; guaranteed by certain Company officers and
shareholders.
|
|
|
619,305
|
|
|
|
675,485
|
|
Note Payable SBA, payable in monthly installments
ranging from $5,553 through $4,754, including interest of 5.79%,
through June 2027, secured by building and building
improvements; guaranteed by certain Company officers and
shareholders.
|
|
|
591,280
|
|
|
|
610,269
|
|
Note Payable Company, payable in monthly
installments of $771 including interest of 5.80%, through April
2009, secured by equipment.
|
|
|
|
|
|
|
2,866
|
|
Note Payable Non-interest bearing, and payable in
monthly installments of $2,000 through, November 2011, secured
by stock of the Company.
|
|
|
45,580
|
|
|
|
43,584
|
|
Note
Payable-Vendor,
payable in monthly installments of $25,451, including interest
of 7.00%, through April 2012, secured by majority
shareholders common stock.
|
|
|
515,739
|
|
|
|
639,846
|
|
Note
Payable-Vendor,
payable in monthly installments of $7,200, including interest of
7.00%, through January 2013, unsecured.
|
|
|
234,276
|
|
|
|
112,347
|
|
Note
Payable-Vendor,
payable in monthly installments of $5,236, beginning March 2010,
including interest of 7.00%, through March 2013, unsecured.
|
|
|
173,787
|
|
|
|
121,737
|
|
Note
Payable-Vendor,
payable in monthly installments of $1,197, including interest of
7.00%, through March 2013, unsecured.
|
|
|
41,656
|
|
|
|
50,000
|
|
Note
Payable-Company
Officer, payable in full upon completion of initial public
offering, including interest of 5.00%; unsecured.
|
|
|
50,000
|
|
|
|
|
|
Note
Payable-Vendor,
payable in monthly installments ranging from $2,000 to $4,000,
including interest of 3.47%, through July 2012, secured by
equipment.
|
|
|
94,000
|
|
|
|
|
|
Note
Payable-Vendor,
payable in monthly installments of $1,553, including interest of
$7.00%, through August 2011 unsecured.
|
|
|
17,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding notes payables
|
|
|
3,222,661
|
|
|
|
3,122,242
|
|
Less: current portion
|
|
|
448,742
|
|
|
|
452,063
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payables
|
|
$
|
2,773,919
|
|
|
$
|
2,670,179
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2009, the Company borrowed $50,000 from
its President and CEO to pay for expenses incurred related to
the Companys initial public offering (IPO). In the fourth
quarter of 2009, the Company assumed ownership of a Planet Beach
Spa located in Irvine, California. In conjunction, the Company
F-14
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumed the note financing the spas equipment totaling
$94,000, and executed a note for overdue rent totaling $17,000.
The Company also amended the locations lease through
August 2011.
As part of the note payable agreement with one of the
Companys vendors, the Company converted an accounts
payable of approximately $59,000 into a four year note payable.
The Company was also allowed additional financing from the
vendor of up to $300,000. Under this agreement, the Company
awarded the vendor with 18,462 shares of common stock and
the option to convert balances due under the note into
additional shares of the Companys common stock within
12 months of an initial public offering of the
Companys common stock at a conversion price equal to the
initial public offering price.
Substantially all of the Companys building and building
improvements are pledged as collateral for various loans of the
Company.
The following is a summary of principal maturities of long-term
debt for each of the next five years and thereafter:
|
|
|
|
|
2010
|
|
$
|
448,742
|
|
2011
|
|
|
616,787
|
|
2012
|
|
|
850,973
|
|
2013
|
|
|
83,266
|
|
2014
|
|
|
60,695
|
|
Thereafter
|
|
|
1,162,198
|
|
|
|
|
|
|
|
|
$
|
3,222,661
|
|
|
|
|
|
|
Significant components of the Companys deferred income tax
liabilities and assets as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
$
|
219,660
|
|
|
$
|
230,968
|
|
Accrued related party wages
|
|
|
3,543
|
|
|
|
3,543
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
223,203
|
|
|
|
234,511
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Bad debt allowance
|
|
|
488,406
|
|
|
|
345,755
|
|
Employee stock option
|
|
|
66,172
|
|
|
|
20,178
|
|
Deferred revenue
|
|
|
54,405
|
|
|
|
55,770
|
|
Employee tax credits carryforward
|
|
|
189,449
|
|
|
|
178,101
|
|
Net operating loss carryforward
|
|
|
174,923
|
|
|
|
114,939
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
973,355
|
|
|
|
714,743
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(750,152
|
)
|
|
|
(480,232
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the provision for income taxes for the
year ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current tax expense (benefit)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Deferred tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
(4,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reconciliation of income taxes computed at the federal
statutory tax rate to income tax provision (benefit) for the
year ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Tax at federal statutory rate
|
|
$
|
(240,853
|
)
|
|
$
|
(257,804
|
)
|
|
$
|
(112,116
|
)
|
Non-deductible expenses
|
|
|
13,275
|
|
|
|
10,787
|
|
|
|
17,168
|
|
State income taxes and credits
|
|
|
(33,718
|
)
|
|
|
(36,529
|
)
|
|
|
(16,488
|
)
|
Employee tax credits
|
|
|
(8,624
|
)
|
|
|
(89,901
|
)
|
|
|
|
|
Valuation allowance
|
|
|
269,920
|
|
|
|
373,447
|
|
|
|
106,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For tax reporting purposes, the Company had cumulated operating
loss carryforwards of approximately $703,588 and $730,000 at
December 31, 2009 and 2008, respectively. If not utilized,
the full amount of such carryforwards would expire in 2028. The
Company has available for tax reporting purposes $184,449 in
employee tax credits that will begin to expire in 2025.
The Company and its subsidiaries file U.S. federal and
state income tax returns. There are no on-going examinations of
income tax returns filed by the Company and its subsidiaries.
U.S. federal income tax returns ending after 2005 are
subject to examination by the Internal Revenue Service. State
income tax returns for tax years ending after 2005 are subject
to examination by related state tax authorities.
On July 1, 2005, the Company adopted the Planet Beach
Franchise Corporation 2005 Incentive Stock Plan (the
Plan) that provides for the granting of stock
options to its directors, officers, employees, and consultants.
Stock options granted under our Plan expire ten years from the
date of grant. Generally, either 20% or 25% of the options vest
on the first anniversary of the grant. Thereafter, the options
vest monthly on a pro rata basis until the fourth or fifth
anniversary of the grant until fully vested.
The Plan includes provisions to make adjustments to reflect
stock splits or stock dividends, and certain other events occur.
The Company believes that the current level of authorized shares
is sufficient to satisfy future option exercises.
The Company has recorded stock-based compensation expense in the
salaries and commissions line item in the amount of $117,933,
$34,769, and $16,970, related to stock awards for the fiscal
years ended December 31, 2009, 2008, and 2007, respectively.
F-16
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys option activity under the plan
for the year ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Number of
|
|
|
Weighted
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Underlying
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
1,864,000
|
|
|
$
|
1.00
|
|
|
|
521,000
|
|
|
$
|
1.00
|
|
|
|
215,000
|
|
|
$
|
1.00
|
|
Granted
|
|
|
|
|
|
|
1.00
|
|
|
|
1,472,000
|
|
|
$
|
1.00
|
|
|
|
316,000
|
|
|
$
|
1.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(70,000
|
)
|
|
|
1.00
|
|
|
|
(129,000
|
)
|
|
$
|
1.00
|
|
|
|
(10,000
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,794,000
|
|
|
|
|
|
|
|
1,864,000
|
|
|
|
|
|
|
|
521,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
639,600
|
|
|
$
|
1.00
|
|
|
|
285,550
|
|
|
$
|
1.00
|
|
|
|
172,500
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
596,664
|
|
|
$
|
0.38
|
|
|
$
|
186,336
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the status of the Companys
nonvested shares (in number of shares that may be purchased) as
of December 31, 2009, and changes during the year ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Weighted Average
|
|
|
|
December 31,
|
|
|
Grant Date Fair
|
|
|
|
2009
|
|
|
Value
|
|
|
Nonvested at January 1, 2009
|
|
|
1,578,450
|
|
|
$
|
937,198
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(354,050
|
)
|
|
|
(346,293
|
)
|
Forfeited
|
|
|
(70,000
|
)
|
|
|
(38,600
|
)
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009
|
|
|
1,154,400
|
|
|
$
|
552,305
|
|
|
|
|
|
|
|
|
|
|
On June 6, 2007, the Company granted 125,000 options
conditional on the Companys successful completion of an
IPO. Management did not consider an IPO probable in 2007 and
2008.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing method with the
following assumptions used for grants issued:
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Volatility
|
|
|
180.00
|
%
|
|
|
186.00
|
%
|
Risk-free interest rate
|
|
|
3.05
|
%
|
|
|
4.71
|
%
|
Expected term (years)
|
|
|
5.67
|
|
|
|
5.83
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
There is no active external or internal market for the
Companys common shares. The Company used similar industry
comparables to measure a historical volatility to calculate the
Companys options. The Company also estimated the
underlying common share value by calculating the Companys
enterprise value for the each year granted.
F-17
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has a defined contribution employee benefit plan
(Plan). The Plan is available to employees who have completed at
least three months of service and are at least 18 years
old. Prior to December 1, 2008, the Company matched 25% of
each dollar contributed up to 4% of the employees annual
salary. The employers contribution vests 100% after five
years. The company temporarily suspended matching contributions
beginning December 1, 2008. Expense incurred by the Company
during 2009, 2008 and 2007 associated with the Plan totaled $0,
$56,099, and $38,882, respectively.
|
|
9.
|
Related
Party Transactions
|
The Companys president and majority shareholder owns a
Contempo Spa that does not pay royalties.
The Companys chief operating officer and shareholder owns
a Contempo Spa that pays a fixed monthly fee of $350 instead of
a 6% royalty. In addition, the brand development fee paid is 1%
instead of 2%.
During 2009 the Company issued a note payable to a vendor at 7%
interest due on April 10, 2012 for the purchase of tanning
products. The note is secured by 85,724 shares of common
stock pledged by the Companys president. During fiscal
2008 and 2009, the largest aggregate amount of principal
outstanding on the note was $750,000, and the amount outstanding
at December 31, 2009 was $515,739.
Certain officers and shareholders of the Company have guaranteed
a portion of the Companys indebtedness as described in
note 5.
On November 18, 2009, the president loaned the Company
$50,000 for the payment of expenses related to the
Companys initial public offering as described in
note 5.
As of December 31, 2009, a certain other officers
family member owed $35,671 to the Company as included in notes
receivable on the accompanying consolidated balance sheet.
Another $39,783 and $73,682 were owed to the Company by
employees and stockholders of the Company for deferred royalties
and unpaid area representative fees, respectively. These amounts
are included in accounts receivable and notes receivables in the
accompanying consolidated balance sheet, respectively.
|
|
10.
|
Commitments
and Contingencies
|
Leases
Guarantees
During 2002, the Company entered into lease agreements for
franchise locations under noncancelable operating leases and
subleased these locations, on terms similar to the primary
operating leases, to franchisees. Rent expense paid by the
Company associated with these leases amounted to $29,424,
$138,174, and $330,052 for 2009, 2008 and 2007, respectively.
Rent income (recovery) recorded by the Company associated with
these subleases amounted to $7,219, $29,149, and $114,526 for
2009, 2008 and 2007, respectively. Net rent expense is recorded
in operating expenses in the consolidated statements of
operations.
At January 1, 2010, the Company is not paying rent on any
of these leases but remains as guarantor on approximately three
leases. Should any of these franchisees default on their
subleases, the Company would be responsible for making rent
payments as guarantor.
F-18
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys maximum theoretical future exposure at
December 31, 2009, computed as the sum of all remaining
lease payments through the expiration dates of the respective
leases, was approximately $267,000 as follows:
|
|
|
|
|
2010
|
|
$
|
87,000
|
|
2011
|
|
|
87,000
|
|
2012
|
|
|
87,000
|
|
2013
|
|
|
6,000
|
|
|
|
|
|
|
Total
|
|
$
|
267,000
|
|
|
|
|
|
|
This amount does not take into consideration any rent recovery
from franchisees or other mitigating measures that the Company
could take to reduce this exposure in the event of default,
including releasing the locations or negotiating lump sum
payments with landlords to terminate leases.
Purchase
Agreements
During 2002, the Company entered into a product purchase
agreement (Purchase Agreement) with its primary vendor (Vendor)
for tanning beds and supplies requiring the Company to purchase
exclusively from the Vendor all spa tanning equipment and all
lamps, parts, accessories, lotions, skin and hair care products,
cleaning equipment and other tanning related products used or
sold in salons owned, operated, or franchised by the Company. In
addition, the Company agreed to designate in existing and future
franchise agreements the Vendor as the exclusive supplier of
equipment and supplies to the Company. This Purchase Agreement
is in effect through 2017. The Company purchased approximately
$2,981,000, $4,860,000, and $7,219,000 of its spa equipment and
products from this Vendor in 2009, 2008 and 2007, respectively.
As part of a purchase agreement with a vendor during 2009, the
vendor will sell product directly to the Companys
franchisees with the net profit on such sales being remitted
directly to the Company. As part of the agreement, cash proceeds
of the profits earned by the Company were to be used to repay an
outstanding accounts payable balance with the vendor. As of
December 31, 2009 and 2008, the amount of accounts payable
due to the vendor subject to the agreement was approximately
$118,000 and $836,000, respectively.
Legal
Proceedings
At December 31, 2009, the Company was party to various
lawsuits filed by current and former franchisees. Outside
counsel for the Company is not able to determine the probable
outcome of these cases at this time. The Company believes the
suits are without merit and is vigorously defending its
position. Accordingly, no amounts are recorded in the
consolidated statements of operations in connection with these
lawsuits.
|
|
11.
|
Supplementary
Information
|
The Company has master franchisor agreements in countries
outside of the United States. The operating revenues and net
income (loss) from those countries are in the table below. There
are no long term assets held in countries outside of the US.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
United States
|
|
|
Rest of World
|
|
|
United States
|
|
|
Rest of World
|
|
|
United States
|
|
|
Rest of World
|
|
|
Operating Revenue
|
|
$
|
12,904,298
|
|
|
$
|
364,822
|
|
|
$
|
23,872,788
|
|
|
$
|
1,133,044
|
|
|
$
|
26,366,020
|
|
|
$
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(515,276
|
)
|
|
$
|
(193,116
|
)
|
|
$
|
(744,932
|
)
|
|
$
|
(13,315
|
)
|
|
$
|
(246,500
|
)
|
|
$
|
(78,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
PLANET
BEACH FRANCHISING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet is
required. Fair value of a financial instrument is the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. Fair value is best determined based
upon quoted market prices. In cases where quoted market prices
are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instruments. Therefore, the
aggregate fair value amounts presented do not represent the
underlying value of the Company.
The recent fair value guidance provides a consistent definition
of fair value, which focuses on exit price in an orderly
transaction (that is, not a forced liquidation or distressed
sale) between market participants at the measurement date under
current market conditions. If there has been a significant
decrease in the volume and level of activity for the asset or
liability, a change in valuation technique or the use of
multiple valuation techniques may be appropriate. In such
instances, determining the price at which willing market
participants would transact at the measurement date under
current market conditions depends on the facts and circumstances
and requires use of significant judgment. The fair value is a
reasonable point within the range that is most representative of
fair value under current market conditions.
In accordance with this guidance, the Company groups its
financial assets and financial liabilities generally measured at
fair value in three levels, based on the markets in which the
assets and liabilities are traded and the reliability of the
assumptions used to determine fair value.
At December 31, 2009, the Company did not have any
financial assets or liabilities to value. At December 31,
2008, the Companys investments of $288,614 were a
level 1.
Net unrealized (loss) on
available-for-sale
securities in the amount of -0-, ($223,606), and ($34,068) for
the years ended 2009, 2008 and 2007, respectively, has been
included in accumulated other comprehensive income (loss).
On February 26, 2010, the Company borrowed $250,000 from
ETS, LLC for the development of prototype concept store in
Irvine, California.
F-20
Units
Units each consisting of one
share of Common Stock and one
Common Stock Purchase Warrant
PROSPECTUS
,
2010
Until ,
2010, all dealers that effect transactions in these securities
may be required to deliver a prospectus, regardless of whether
they are participating in this offering. This is in addition to
the dealers obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or
subscriptions.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, to be paid in
connection with the sale of units being registered, all of which
we will pay. All amounts, other than the SEC registration fee,
are estimates.
|
|
|
|
|
SEC registration fee
|
|
$
|
2,002
|
|
NYSE Amex listing application fee
|
|
|
55,000
|
|
Printing expenses
|
|
|
|
*
|
FINRA filing fee
|
|
|
3,308
|
|
Financial advisory fee
|
|
|
25,000
|
|
Directors and officers insurance
|
|
|
|
*
|
Legal fees and expenses
|
|
|
|
*
|
Accounting fees and expenses
|
|
|
|
*
|
Blue sky fees and expenses
|
|
|
|
*
|
Transfer agent fees
|
|
|
|
*
|
Miscellaneous
|
|
|
|
*
|
Total
|
|
$
|
|
*
|
|
|
|
* |
|
To be filed by amendment. |
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Our certificate of incorporation provides that we must
indemnify, advance expenses to and hold harmless our directors
to the fullest extent permitted by the General Corporation Law
of the State of Delaware as it now exists or may be amended in
the future. Under current Delaware law, a corporation may
indemnify directors made or threatened to be made a party to any
threatened, pending or completed civil, criminal, administrative
or investigative action, suit or proceeding because of that
persons service as a director of the corporation or
because that person was serving at the corporations
request as a director of another corporation or enterprise. The
corporation may indemnify such a person for expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement that are actually and reasonably incurred by the
person in connection with the action, suit or proceeding,
provided that the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to a criminal
action or proceeding, if the person had no reasonable cause to
believe his or her conduct was unlawful.
In each instance of indemnification, the corporation may only
indemnify the person following a determination that the person
met the applicable standard of conduct by:
|
|
|
|
|
a majority vote of the directors who are not parties to the
action, suit or proceeding;
|
|
|
|
a committee of the board of directors designated by a majority
vote of those disinterested directors;
|
|
|
|
by independent legal counsel if there are no disinterested
directors or the disinterested directors so direct; or
|
|
|
|
the stockholders.
|
A corporation may pay expenses (including attorneys fees)
incurred by the director in defending an action, suit or
proceeding in advance of the final disposition of the action,
suit or proceeding upon receipt of an undertaking by the
director to repay the corporation the amount paid in advance if
it is ultimately determined that the person is not entitled to
be indemnified. The corporation shall be required to indemnify,
or
II-1
advance expenses to, our directors in connection with a
proceeding commenced by our directors only if the board of
directors authorized the commencement of the proceeding.
At the present time, there is no pending litigation or
proceeding involving a director, officer, employee or other
agent of ours in which indemnification would be required or
permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
We maintain a directors and officers liability
insurance policy, the general effect of which is to provide:
(a) coverage for the Company with respect to amounts it is
permitted to pay to directors under the indemnification
provisions set forth in the Delaware General Corporation Law and
Article V of the Companys Bylaws and
(b) coverage of the directors and officers of the Company
for liabilities (including certain liabilities under the federal
securities laws) incurred by such persons in their capacities as
directors and officers for which they are not indemnified by the
Company.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
The following is a summary of transactions by us from
January 1, 2007 through the date of this registration
statement involving sales of our securities that were not
registered under the Securities Act of 1933, as amended, or the
Securities Act. This summary gives effect to the 1 for 3.5
reverse stock split we effected on March 18, 2010.
On September 30, 2008, we issued 879 shares of common
stock to JTL Enterprises, Inc., one of our suppliers of water
massage machines, when we converted $22,350 of accounts payable
into a promissory note. In addition, we granted JTL Enterprises,
Inc. the option to convert the remaining outstanding balance we
owed on the note into common stock, which option expired on
September 30, 2009. We believe that the issuance of the
shares and the option was exempt from the registration and
prospectus delivery requirements of the Securities Act by virtue
of Section 4(2) of the Securities Act.
MT Industries, Inc. is a supplier of U-V equipment and related
products. On October 3, 2008, we converted $92,483 of
accounts payable owed to MT Industries for equipment purchases
into a four-year, unsecured note payable. Upon execution of the
note, we awarded MT Industries 4,396 shares of common stock
and the option to convert the balance owed into additional
shares of common stock within 12 months. This option to
convert expired October 3, 2009. We believe that the
issuance of the shares and the option was exempt from the
registration and prospectus delivery requirements of the
Securities Act by virtue of Section 4(2) of the Securities
Act.
On October 31, 2008 as part of the note payable agreement
with one of our vendors, we converted an accounts payable of
approximately $59,000 into a four year note payable. We were
also allowed additional financing from the vendor of up to
$300,000. Under this agreement, we awarded the vendor
5,275 shares of common stock and the option to convert
balances due under the note into additional shares of our common
stock within 12 months of an initial public offering of our
common stock at a conversion price equal to the initial public
offering price. We believe that the issuance of the shares and
grant of the option were exempt from the registration and
prospectus delivery requirements of the Securities Act by virtue
of Section 4(2) of the Securities Act.
II-2
In addition, we granted options to purchase our common stock to
our employees pursuant to our 2005 Stock Option Plan as follows:
|
|
|
|
|
Grant Date
|
|
Number Granted
|
|
|
1/1/2007
|
|
|
1,429
|
|
4/1/2007
|
|
|
286
|
|
4/13/2007
|
|
|
25,429
|
|
4/16/2007
|
|
|
286
|
|
5/14/2007
|
|
|
286
|
|
5/16/2007
|
|
|
571
|
|
5/24/2007
|
|
|
286
|
|
6/6/2007
|
|
|
35,714
|
|
7/2/2007
|
|
|
857
|
|
7/16/2007
|
|
|
286
|
|
8/29/2007
|
|
|
14,286
|
|
9/10/2007
|
|
|
8,857
|
|
10/9/2007
|
|
|
286
|
|
10/29/2007
|
|
|
286
|
|
11/4/2007
|
|
|
286
|
|
11/9/2007
|
|
|
286
|
|
12/10/2007
|
|
|
286
|
|
12/21/2007
|
|
|
286
|
|
9/1/2008
|
|
|
419,143
|
|
10/1/2008
|
|
|
1,429
|
|
1/1/2010
|
|
|
40,000
|
|
We believe that the above disclosed grants of options were
exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of
Section 4(2) of the Securities Act or Rule 701
promulgated under Section 3(b) of the Securities Act, as
transactions not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to
compensation.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1*
|
|
First Amended and Restated Certificate of Incorporation
|
|
3
|
.2
|
|
Bylaws
|
|
4
|
.1*
|
|
Form of common stock certificate
|
|
4
|
.2
|
|
Form of warrant certificate
|
|
4
|
.3*
|
|
Form of unit certificate
|
|
4
|
.4*
|
|
Form of Warrant
Agreement
|
|
4
|
.5
|
|
Form of representatives purchase warrants
|
|
5
|
.1*
|
|
Opinion of Richards, Layton & Finger, P.A
|
|
10
|
.1
|
|
Form of Single Unit Franchise Agreement
|
|
10
|
.2
|
|
Form of
Multi-Unit
Option Agreement
|
|
10
|
.3
|
|
Form of Master Franchisor Agreement
|
|
10
|
.4
|
|
Form of Area Representative Agreement
|
|
10
|
.5+
|
|
2005 Stock Option Plan
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
10
|
.6+*
|
|
Employment Agreement between the Registrant and Stephen P. Smith
|
|
10
|
.7+*
|
|
Employment Agreement between the Registrant and Richard L. Juka
|
|
10
|
.8
|
|
Promissory Note dated March 9, 2007 to Capital One,
National Association
|
|
10
|
.9
|
|
Promissory Note dated June 13, 2007 to Small Business
Association
|
|
10
|
.10
|
|
Promissory Note dated July 19, 2007 to Whitney National Bank
|
|
10
|
.11*
|
|
Asset Purchase Agreement, by and among Planet Beach Franchising
Corporation, Planet Beach Brands, L.L.C. and Stephen P. Smith
|
|
21
|
.1
|
|
List of subsidiaries of the registrant
|
|
23
|
.1*
|
|
Consent of Richards, Layton & Finger, P.A
|
|
23
|
.2
|
|
Consent of Postlethwaite & Netterville, APAC
|
|
24
|
.1
|
|
Power of Attorney (see signature page)
|
|
|
|
* |
|
To be filed by amendment. |
|
+ |
|
Management contract or compensatory plan or arrangement. |
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(a)
i. To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate
offering price set forth in the Calculation of
Registration Fee table in the effective registration
statement.
iii. To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(b)
i. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
ii. To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
iii. For the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities, that in a primary
offering of securities of the undersigned registrant pursuant to
this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the
securities are offered or sold to such
II-4
purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and
will be considered to offer or sell such securities to such
purchaser:
(I) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(II) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(III) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(IV) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
2. To provide to the underwriter at the closing specified
in the underwriting agreements certificates in such
denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
3.
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 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 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Marrero, State of
Louisiana, on the second day of April 2010.
PLANET BEACH FRANCHISING CORPORATION
Stephen P. Smith
President, Chief Executive Officer
(Principal Executive Officer) and Chairman of
the Board of Directors
POWER OF
ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated. Each person whose
signature appears below constitutes and appoints Stephen P.
Smith and Craig M. Berner, and each of them individually, his
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this
registration statement, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
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Signature
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Title
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Date
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/s/ Stephen
P. Smith
Stephen
P. Smith
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President, Chief Executive Officer (Principal Executive Officer)
and Chairman of the Board of Directors
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April 2, 2010
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/s/ Richard
L. Juka
Richard
L. Juka
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Senior Vice President, Chief Operating Officer, Secretary,
Treasurer and Director
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April 2, 2010
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/s/ Craig
M. Berner
Craig
M. Berner
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Chief Financial Officer (Principal Financial and Accounting
Officer)
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April 2, 2010
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/s/ Eric
E. Bosch
Eric
E. Bosch
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Director
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April 2, 2010
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/s/ Gary
N. Solomon
Gary
N. Solomon
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Director
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April 2, 2010
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/s/ Ronald
Warner
Ronald
Warner
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Director
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April 2, 2010
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II-6
EXHIBIT INDEX
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Exhibit
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Number
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Description
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1
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.1*
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Form of Underwriting Agreement
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3
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.1*
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First Amended and Restated Certificate of Incorporation
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3
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.2
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Bylaws
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4
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.1*
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Form of common stock certificate
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4
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.2
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Form of warrant certificate
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4
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.3*
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Form of unit certificate
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4
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.4*
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Form of Warrant Agreement
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4
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.5
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Form of representatives purchase warrants
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5
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.1*
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Opinion of Richards, Layton & Finger, P.A.
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10
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.1
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Form of Single Unit Franchise Agreement
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10
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.2
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Form of
Multi-Unit
Option Agreement
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10
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.3
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Form of Master Franchisor Agreement
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10
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.4
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Form of Area Representative Agreement
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10
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.5+
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2005 Stock Option Plan
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10
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.6+*
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Employment Agreement between the Registrant and Stephen P. Smith
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10
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.7+*
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Employment Agreement between the Registrant and Richard L. Juka
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10
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.8
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Promissory Note dated March 9, 2007 to Capital One,
National Association
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10
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.9
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Promissory Note dated June 13, 2007 to Small Business
Association
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10
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.10
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Promissory Note dated July 19, 2007 to Whitney National Bank
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10
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.11*
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Asset Purchase Agreement, by and among Planet Beach Franchising
Corporation, Planet Beach Brands, L.L.C. and Stephen P. Smith
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21
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.1
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List of subsidiaries of the registrant
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23
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.1*
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Consent of Richards, Layton & Finger, P.A
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23
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.2
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Consent of Postlethwaite & Netterville, APAC
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24
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.1
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Power of Attorney (see signature page)
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* |
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To be filed by amendment. |
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+ |
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Management contract or compensatory plan or arrangement. |