Formulated Solutions

MJ,

I want to thank you personally for taking this out of a private forum, where I may have never had a chance to respond, and allowing me to address this publicly in this more open venue.

I will be the first one to admit that complete elimination of the product diversion is no simple task, and this may come as a surprise from a competitor, but I applaud the efforts that JA and Cal Tan have made towards a reduction in the amount of their product which is being salon diverted.

Our Mission Statement is as follows; “Formulated Solutions exists to enhance consumer products through creativity and invention, delivering our customers unmatched formulations, innovative packaging and the highest quality products.” I believe to stay true to this mission that we have set forth, our company, must also control the image and distribution of our products, thus the we do not support the distribution of our tanning products through channels that are detrimental to salons and reduces our ability to control the quality of the product or the education that supports it sale.

When my two partners and myself purchased the Technique Labs brands in December of 2000, I am not sure I fully understood the full scope of the product diversion issue. Remember our core business has always been formulation consulting and contract manufacturing, our drift into having our own brand, is somewhat of an enjoyable learning experience. I generally liked the tanning industry, and felt that a company with our development skills could build a nice niche, since from what I observed the product attrition rate was very high, and newer more innovative products were always replacing current formulations. (Even within well-established brands)

A year before our purchase, I personally started spending a significant time in and around different tanning salons in my area (Fort Lauderdale at that time), to learn more about the industry and what was driving sales for those salon owners of tanning products. The obvious frustration at that time for most of those salon owners was the direct diversion of AG product at every food and drug store in our area. To make a long story short, perhaps I should have paid more attention in my “business due diligence” classes back in school, because after our purchase, it became quite clear that the diversion problem was much more severe, and was effecting many more salon owners, than I had originally expected. At the time of our purchase the previous company employed 19 telemarketers, and had a customer list that was representative of the “who’s who” in the Internet product diversion world. In fact, little did we know this, at the time of our purchase but 38% of the previous companies sales were through what we now consider diversionary channels.

That being said, my partners and I needed to make a decision about the future of our company in this industry. I think in order for us as a manufacturer to truly support the independent salon owner, who is attempting to make a profit by the sale of our products within their salon, and to show our support for the reputable distribution network that we were attempting to grow, drastic changes needed to be made within our newly acquired organization. I think in order for a company to make change, regardless of the change two things must happen; 1) A company wide policy or values system needs to be set, a roadmap if you will on how the business will be run. 2) Each policy or value needs a corresponding KPI or Key Performance Indicator, to monitor the progress and visually show you how you have done. And that is what we did, we made the decision to restructure how we would fit in this industry.

We now employee 5 well trained professional customer service representatives, which in Tampa is no easy tack, and I have over 65 W-2 to prove it, who work with our distributors and customers to provide education and fulfill orders. We have eliminated all direct sales to known diversionary suppliers and sources. We have worked with our distribution network, on an at will basis to eliminate secondary sources of product diversion, both at the sub-distributor and the salon level. We have, despite our network within the mass-market distribution network, made the conscious decision not to support self-serving or retail distribution venues of our tanning products. And are continuing work to grow our business in a way that we feel best represents the culture of our company.

Anyone that has been in business can understand that the prospect of starting your business off by eliminating nearly 40% of your total sales is not at all that appealing. I can assure you the decision to complete restructure a new business, within 4 months of the purchase is not without it obstacles. The good news, however, is that sales for our company are up this year, and the relationships that we are building are stronger, and the availability of our products on the internet, an other diversionary places is down an estimated 350% so I am convinced now more that ever that or decision and commitment to the salon owner and the reputable distribution network that supports them was the right decision, despite the few hurdles and scarifies along them way.

I hope that answers the question, probably way to much history and a little wordy, but I think in order to better understand where we are going, it is good to see where we started. We are committed to growing our tanning lotion business with salon owners, not against them.