EXHIBIT C
DALLDQCS\a^?34^6240427.10 356412-3
FINANCIAL STATEMENTS
FACES COSMETICS USA, INC. FINANCIAL STATEMENTS
The Financial Statements as of December January 31, 30062008 have been prepared without an audit. Prospective franchisees or sellers of franchises should be advised that no independent Certified Public Accountant has audited these figures or expressed an opinion with regard to their content or form.
DALLDOC
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356412-3
5:37 PM 02/13/08
Accrual Basis
Faces Cosmetics USA
Balance Sheet
As of January 31, 2008
Jan 31, 08 ASSETS Current Assets Chequing/Savings 11120 TD Bank US$ 11130 Bank of America Total Chequing/Savings Accounts Receivable 11210 Accounts receivable Total Accounts Receivable Other Current Assets 11400 Prepaid Expenses 22123 Due from Faces Cos PLC Total Other Current Assets Total Current Assets Fixed Assets 12300 Computer Equipment 12301 Accumulated Amortization Total Fixed Assets TOTAL ASSETS LIABILITIES & EQUITY Liabilities Current Liabilities Accounts Payable Accounts Payable Accrued Payables Total Accounts Payable Other Current Liabilities 22122 Due To Faces Cosmetics Total Other Current Liabilities Total Current Liabilities Long Term Liabilities 22115 Faces Holdings Inc 22119 Due to/from Faces Canada Total Long Term Liabilities Total Liabilities Equity 29999 Retained Earnings Net Income Total Equity TOTAL LIABILITIES & EQUITY • 538,288.01
991.287.81 1,064.332.51 1,072,315.39 538,288.01 536,448.86 271,364,40 271,364.40
320.36 6,947.69 7,268.05
47,617.62 210,198 79 257,816.41
3,091.01 -1.251.86 1,839.15
902.12 7.080.7G 7,982.88
1,064,332.51
-80.027.58 -1,000 00 -81,027.58
-248,926.51 -204.073.29 -452,999.80
5:37 PM 02/13/08 Accrual Basis
Faces Cosmetics USA Profit
& Loss
August 2007 through January 2008
Aug *07 - Jan 08 Ordinary Income/Expense Expense 42100 Advertisement 0 Show Exponscs 42140 Bank Charges 42325 Consulting Fees 42370 Rent Expense 42383 Travel Expenses 42386 Travel USD 42400 Salaries and Wages 44153 Commission Total Expense Net Ordinary Incomo Other Income/Expense Other Expense 0 Audit Expenses 42327 Franchise Expense 42329 Legal expenses Total Other Expense Net Other Income
-97.216.79 -106,854.50
1,845.00 2,423.50 166.65 -4.000.00 3,210.18 7.963.50 14,954.37 75,291.30 5,000.00 106,854.50
10,000.00 69,677.83 17,540.96 97.218.79
Net Income
-204,073.29
M R P R GROUP c P A
s
&
A d v i s o r s
FACES COSMETICS USA. INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED JULY 31, 2007, 2006 AND 2005 AND INDEPENDENT AUDITORS' REPORT
One Northwestern Plaza. 3841 I Northwestern Highway. Suile 800, South field, Ml 48Q34-553B (348) 357-9000 Fan (148) 357-9001 www.mrpr com
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders Faces Cosmetics USA, Inc. Etobicoke, Ontario
. We have audited the balance sheets of Faces Cosmetics USA, Inc. (a Nevada corporation) as of July 31, 2007 and 2006, and the related statements of operations, changes in shareholders' equity (deficit) and cash flows for each of the years in the three year period ended July 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Faces Cosmetics USA, Inc. as of July 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three year period ended July 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
Southfield, Michigan January 8, 2008
PIL-
ARIS "
M R P R GROUP c P A
s
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A d v i s o r s
TABLE OF CONTENTS
FINANCIAL STATEMENTS: Balance Sheets, July 31, 2007 and 2006 Statements of Operations, For the Years Ended July 31, 2007, 2006 and 2005 Statements of Changes in Shareholders' Equity (Deficit), For the Years Ended July 31, 2007, 2006 and 2005 Statements of Cash Flows, For the Years Ended July 31, 2007, 2006 and 2005 Notes to Financial Statements
FACES COSMETICS USA, INC.
BALANCE SHEETS JULY 31,2007 AND 2006
ASSETS 2007 CURRENT ASSETS: Cash and cash equivalents Accounts receivable - Notes 2 and 3 Prepaid expenses Note 2 Due from related parties - Note 4 Total current assets 470,530 PROPERTY AND EQUIPMENT - Note 1 : Computer equipment Less: Accumulated depreciation Net property and equipment 1,839 OTHER ASSETS: Accounts receivable - Notes 2 and 3 Total other assets TOTAL 135.000 $ 607,369 $ 344 51,538 18,610 290.226 360,718 2006
$ 1,322 136,364 42,618 290.226
3,091 1.252)
f
3,091 (464) 2.627
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES: Accounts payable Due to related parties - Note 4 Total current liabilities SHAREHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value - authorized unlimited number of shares; issued and outstanding, 100 shares Retained earnings (deficit) Shareholders' equity (deficit)
$ 16,678 839.618 1 856,296 11.662 11.663 S 1 (248.928) (248.927) S 607.369 $ 351.682 351,682 363.345
TOTAL
See notes to financial statements. -7-
FACES COSMETICS USA, INC.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JULY 31. 2007. 2006 AND 2005
2007 REVENUES: Initial franchise fees - Note 3 Franchise royalty Other Total revenues $
2006
2005
$ 339,000 16,076
355,076 25,000 1,538 6,700" 33,238 $ 153,750
153,750 31 ADMINISTRATIVE AND OPERATING EXPENSES: Advertisements Audit expenses Bank charges Commissions Consulting fees Depreciation Franchise expenses Insurance Legal expenses Management fees Meals and entertainment Office supplies Postage and stationary Public relations Recruitment expenses Rent expense Salaries and wages Show expenses Telephone Travel expenses Total administrative and operating expenses NET INCOME (LOSS) 196 10,000 485 13,669 54,460 788 22,538 16,576 65,203 8,561 6,728 930 28,443 30,000 34,715 220,757 21,392 2,953 77.272 615.666
74
464
169,146 1,596
4,015 170.773 S f 17.023) 4.553 $26^85
See notes to financial statements. -8-
FACES COSMETICS USA, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JULY 31, 2007, 2006 AND 2005
11,663 Shares BALANCE, JULY 31,2004 Net loss for the year ended July 31,2005 BALANCE, JULY 31,2005 Net income for the year ended July 31, 2006 BALANCE, JULY 31,2006 Net loss for the year ended July 31, 2007 BALANCE, JULY 31,2007 100 100 100 100 Amount $1 (260590) $ Ï248.927Ï
$1
Retain ed Earnin gs (Deficit )
$
( 17.023) ( 17,023)
28.6 85 11,6 62
(260.590)
Total
$
1
( 17.023) ■( 17,022)
28.6 85
See notes to financial statements. -9-
FACES COSMETICS USA, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JULY 31. 2007. 2006 AND 2005
2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation Changes in operating assets and liabilities: Accounts receivable Prepaid expenses Accounts payable 16.678 Net cash (used in) provided by operating activities
2006
2005
$(260,590)
$ 28,657
$ ( 17,023)
788 (219,826) ( 24,008)
464 ( 1,538) ( 50,000) 40,993 ( 44,754) __ _____________ 68.576 (111.777)
(486.958)
CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of computer equipment ______________________________________ Net cash used in investing activities ______________________________ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in advances (to) from related parties Net cash provided by (used in) financing activities INCREASE (DECREASE) IN CASH CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR 487.936 487.936 978 344 1.322
( 3.091) _____________ f 3.091)
(73.709) (73.709) ■ ( 8,224) 8.568 $ 344
120.344 120,344 8,567 1 $ 8.568
See notes to financial statements. -10-
FACES COSMETICS USA, INC. NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Nature of Business Faces Cosmetics USA, tnc.'s ("the Company") principal activities are the sale of franchises in the United States of America and internationally under both master and individual franchise agreements. The Company is located in Canada along with its parent company Faces Cosmetics, pic (FHP) and related companies Faces Holdings, Inc. (FHI) and Faces Cosmetics, Inc. (FCI). FCl provides management and financial services to the group and has invested significant funds into the development of the USA market. The Company has a presence in the USA in 2006 with a store in Arlington, Texas and in 2007 has sold franchise rights to several other franchisees in Virginia, Maryland and California. In that connection, the Company has undertaken additional market research and invested in additional executive management and consultants and incurred significant other start-up costs which are to be reimbursed to the Company by its parent company and a related company (Note 4).
NOTE 2 - Summary of Significant Accounting Policies Basis of presentation - The financial statements is prepared and presented in U.S. dollars in accordance with accounting principles generally accepted in the United States of America. Cash and cash equivalents - Cash on short-term deposits in bank accounts and other short-term investments is considered as cash and cash equivalents. Accounts receivable - At July 31, 2007 and 2006, accounts receivable consists of franchise fees due in connection'with initial franchise sales which are payable upon the opening of various stores from fiscal 2007 to 2011. At July 31, 2007, receivables also include royalty fees of approximately $15,000 due from the Texas franchisee (see Note 3). Management expects to collect the franchise fees as the stores open; and have determined that no allowance for doubtful accounts is necessary. Prepaid expenses - At July 31, 2007 and 2006, prepaid expenses consists of costs related to anticipated future franchise sales and will be amortized over future periods. Property and equipment - The computer equipment is recorded at cost and depreciation is computed on an accelerated method. Costs of maintenance and repairs are charged to expense when incurred. Asset impairment - The Company records impairment losses on long-lived assets when events and circumstances indicate that the assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying amounts. If the future undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are adjusted to their fair values. NOTES TO FINANCIAL STATEMENTS (CONTINUED) _________________________
NOTE 2 - Summary of Significant Accounting Policies - (Continued) Franchise Arrangements - Individual franchise arrangements consist of a license which provides for payment of initial fees as well as services to the Company based on a percent of sales. Franchisees pay related occupancy costs including rent, property taxes, insurance, and maintenance. Franchise fee revenue recognition - The Company recognizes initial franchise fee revenue from sales of individual franchises when substantially all significant services to be provided by the Company have been performed. In management's opinion, substantially all significant costs of servicing the initial franchise agreements has been incurred relating to initial franchise fees recognized as income in the accompanying statements of operations. Continuing fees and royalties are recognized in the period earned.
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 certain estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from such estimates and assumptions.
NOTE 3 - Initial Franchise Fee Revenue and Related Receivables A summary of initial franchise fees revenue for fiscal 2007 is as follows: Area franchises: Maryland - initial franchise fee store plus stores 2-7 through 6/30/2011 Virginia - initial franchise fee store plus stores 2-5 through 6/27/2010 California - initial franchise fee store plus stores 2-5 through 6/27/2010 Other initial and royalty fees
$ 117,500 87,500 87,500 62.576 Total
Less Franchise fee revenue collected during the fiscal year Balance receivable at July 31 Current Long-term portion NOTES TO FINANCIAL STATEMENTS (CONTINUED) $ 135.000
NOTE 3 - Initial Franchise Fee Revenue and Related Receivables - (Continued) During fiscal 2007, the Company entered into a franchise agreement with a franchise located in the state of Maryland. In Maryland the revenue from the sale of the area rights to a franchise is not collectable until a franchise location commences business; nevertheless, it is managements opinion that the revenue has been earned in the year the contract was signed considering all material costs related to obtain the contract sale have been incurred.
NOTE 4 - Related Party Transactions At July 31, 2007 and 2006, amounts due from (to) related parties is as follows: 2007 2006 Due from related parties: Faces Cosmetics pic Faces Holdings, Inc. Total
$ 210,199 $210,199 80.027 80.027 $ 290.226 S 290.226
Amounts due from FHP and FHI consists of all reimbursable start-up costs, including market research, legal, salary and other costs incurred from the start of the Company's business until approximately July 31, 2006. Costs of this nature since that date, are included in administrative an operating expenses in the accompanying statements of operations for fiscal 2007.
FACES COSMETICS USA, INC.
Due to related parties: Faces Cosmetics, Inc. Faces Canada, Inc. Total
$ (835,618) $ 351,682 ( 4.000) _______________ S f 839.618) $351.682
Amounts due to FCI relate to the payments by FCI of almost all of the Company costs referred to above and also for a significant portion of other general operating costs and management fees.