EX-10 32 ex10-27.txt 10.27; LETTER AGREEMENT EXHIBIT 10.27 Technology Investment Capital Corp. 8 Sound Shore Drive, Suite 255 Greenwich, Connecticut 06830 July 11, 2005 Advanced Aesthetics, Inc. Anushka PBG Acquisition Sub, LLC Anushka Boca Acquisition Sub, LLC Wild Hare Acquisition Sub, LLC DiSchino Corporation Advanced K, LLC 501 Madison Avenue New York, NY 10022 Attention: Andrew Lipman Re: Note and Warrant Purchase Agreement Gentlemen: Reference is hereby made to that certain Note and Warrant Purchase Agreement dated as of March 31, 2004 (as heretofore amended, the "Purchase Agreement"), by and among Technology Investment Capital Corp., as Collateral Agent and Purchaser (the "Purchaser") and Advanced Aesthetics, Inc. (the "Parent"), Anushka PBG Acquisition Sub, LLC, Anushka Boca Acquisition Sub, LLC, Wild Hare Acquisition Sub, LLC, DiSchino Corporation and Advanced K, LLC (collectively, the "Co-Borrowers" and, together with the Parent, the "Obligors"). Capitalized terms used in this letter agreement without definition shall have the respective meanings ascribed to them in the Purchase Agreement. On July 7, 2005, the Parent issued and sold to affiliates of Pequot Capital Management an aggregate of 5,000 of its shares of Series F Preferred Stock, par value $.01 per share, for an aggregate purchase price of $5,000,000, in accordance with the terms set forth in the summary of terms attached hereto as Exhibit A (the "Series F Investment"). We have been advised by Parent that it is contemplating a financing pursuant to which it will issue shares of its Common Stock in exchange for cash in an aggregate amount of not less than $5,000,000 and not more than $15,000,000 (the "Common Stock Investment"). We have also been advised by the Parent that it is contemplated that the Parent and its shareholders (including the investors in the Common Stock Investment) will execute a share exchange agreement or merger agreement (the "Public Transaction") with a to-be-named public company ("Newco"). As a result, the Parent will become a wholly-owned subsidiary of Newco and all existing and new shareholders of the Parent will receive shares of common stock of Newco ("Newco Common Stock") in exchange for their equity in the Parent. In connection with the Public Transaction it is also contemplated that the Purchaser will exchange its Warrant for a warrant to purchase shares of Newco Common Stock. The parties hereto hereby agree as follows: 1. Amendments to Financial Covenants. The parties hereto shall use commercially reasonable efforts within sixty (60) days after the date hereof to amend, in a manner reasonably satisfactory to the parties hereto, the financial covenants set forth in Sections 7.1 through 7.5, inclusive, of the Purchase Agreement based on the financial projections most recently prepared by the Obligors in connection with the Series F Investment, true and complete copies of which have been delivered to the Purchaser; provided, that (i) such amendments shall become effective only upon the execution by the parties hereto of definitive documentation setting forth such amendments, which documentation shall be reasonably satisfactory in form and substance to the parties hereto, and (ii) until the execution and delivery by all parties hereto of such definitive documentation, the provisions of Sections 7.1 through 7.5, inclusive, of the Purchase Agreement shall continue in effect without change. 2. Prepayment of Seller Notes. Notwithstanding any provisions of the Transaction Documents to the contrary, the Purchaser hereby consents to the use by the Parent of a portion of the net cash proceeds of the Series F Investment, in an aggregate amount not to exceed $900,000, to prepay a portion of the outstanding principal amount of the Seller Notes and accrued but unpaid interest on such prepaid principal amount. 3. Public Transaction; Exchange of Warrant; Notices. Notwithstanding any provisions of the Transaction Documents to the contrary, the Purchaser hereby irrevocably consents to the consummation of the Public Transaction. In connection therewith, Purchaser hereby irrevocably agrees (i) to exchange its Warrant for a warrant to purchase a number of shares of Newco Common Stock equal to its pro rata number of shares of the Newco Common Stock issued to the securityholders of the Parent (the "Newco Warrant") and (ii) that this letter agreement satisfies any and all notice requirements under the Transaction Documents with respect to the Public Transaction and all other transactions described herein. The Newco Warrant shall be identical in form and substance to the Warrant other than the number of the Warrant Shares, the Exercise Price and Trigger Price of the Warrant (and each as defined therein) which will be adjusted in connection with the Public Transaction. 4. Conversion of KCO Note into Common Stock. Notwithstanding any provisions of the Transaction Documents to the contrary, in connection with the closing of the Public Transaction, the Purchaser hereby consents to the conversion of the KCO Note (the "KCO Note Conversion"), including all interest accrued and unpaid thereon, into shares of Common Stock of Parent at a conversion price equal to the price per share of Common Stock in the Common Stock Investment. 5. Conversion of Series B Preferred Stock into Common Stock. Notwithstanding any provisions of the Transaction Documents to the contrary, in connection with the closing of the Public Transaction, the Purchaser hereby consents to the conversion of all issued and outstanding shares of Series B Preferred Stock of the Parent, into shares of Common Stock (the "Series B Conversion") at a conversion price equal to the price per share of Common Stock in the Common Stock Investment. 6. Waiver of Preemptive Rights. Purchaser hereby waives its rights under Section 4 of the Shareholders Agreement to purchase shares of Common Stock in connection with: (i) the Series F Investment, (ii) the Common Stock Investment (as long as the price per share of -2- Common Stock in the Common Stock Investment is equal to at least the Trigger Price (as defined in the Warrant)), (iii) the Public Transaction, (iv) the KCO Note Conversion and (v) the Series B Conversion. 7. Termination of Shareholders Agreement. The parties agree that upon consummation of the Public Transaction, without any further action by the parties, the Shareholders Agreement will automatically terminate and be of no further force and effect. 8. Registration Rights Agreement. Parent will cause Newco to assume all obligations of Parent under the Registration Rights Agreement with respect to the Newco Common Stock issuable upon exercise of the Newco Warrant. 9. Issuance of Additional Warrants. (a) At the time of the execution of the amendment of the Purchase Agreement pursuant to Section 1 hereof, Parent shall cause Newco to execute and issue to the Purchaser additional warrants (the "Additional Warrants") to purchase shares of Newco Common Stock, subject to the following: (a) at the option of the Parent, such warrants shall provide either (i) that they are initially exercisable to purchase a number of shares of Newco Common Stock into which 50,000 shares of Common Stock will be exchangeable in connection with the Public Transaction, at an initial exercise price per share equal to $.01 divided by the number of shares of Newco Common Stock that will be issued in exchange for each share of Common Stock of Parent in connection with the Public Transaction, or (ii) that they are initially exercisable to purchase, at an initial exercise price of an amount per share equal to $2.50 divided by the number of shares of Newco Common Stock that will be issued in exchange for each share of Common Stock of Parent in connection with the Public Transaction, an aggregate number of shares of Newco Common Stock equal to 0.978% of the aggregate number of shares of Newco Common Stock then outstanding on a fully diluted basis (after giving effect to the issuance of the Additional Warrants, and assuming the exercise in full of all outstanding options, warrants and other rights to subscribe for or purchase Common Stock or other equity securities of the Parent and the conversion into shares of Common Stock of all then outstanding shares of convertible preferred stock and other convertible securities of the Parent (if any), whether or not then currently exercisable or convertible); and (b) in all other respects, the Additional Warrants shall be identical in form and substance to the Warrant. Notwithstanding the foregoing, in lieu of the issuance of the Additional Warrants, Parent may, at its option, make a cash payment of $100,000 to the Purchaser. (b) The Parent represents and warrants to, and agrees with, the Purchaser that (x) the Newco Warrant and the Additional Warrants shall be duly authorized and executed by Newco, and shall be the legally valid and binding obligations of Newco, enforceable against Newco in accordance with their terms; (y) the shares of Newco Common Stock issuable upon exercise of the Newco Warrant and the Additional Warrants shall be duly and validly reserved for issuance upon such exercise and, when issued and delivered against payment therefor as provided therein, will be validly issued, fully paid and non-assessable and subject to no Liens in respect of the issuance thereof; and (z) neither the issuance nor the exercise of the Newco Warrant and the Additional Warrants shall violate or conflict with any agreement, instrument or document to which the Parent or any of the other Obligors is a party or require the consent of any third party. -3- 10. Representations and Warranties. Not later than the closing of the Public Transaction the Obligors will deliver to the Purchaser updated Disclosure Schedules (the "Updated Disclosure Schedules"). The Obligors hereby jointly and severally represent and warrant to the Purchaser that at the closing of the Public Transaction each of the representations and warranties made by the Obligors in the Purchase Agreement (as qualified by the Updated Disclosure Schedules) will be true and correct in all material respects on and as of the date thereof to the same extent as if made on and as of the date hereof except to the extent that such representations and warranties specifically relate to an earlier date, in which case they are true and correct as of such earlier date. The Obligors hereby jointly and severally represent and warrant to the Purchaser that as of the date hereof no event has occurred and is continuing or will result from the transactions contemplated hereby which constitutes (or with notice or the passage of time or both would constitute) an Event of Default. 11. Deposit of Additional Escrow Amount. Within 60 days of the date hereof, the Co-Borrowers shall deposit in the Escrow Account, to be maintained therein and disposed of in accordance with the terms of the Escrow Account Control Agreement, an additional sum equal to the aggregate amount of interest that would accrue under the Notes during a period of three (3) calendar quarters (assuming that the outstanding principal amount of the Notes during all of such period is $10,000,000 and that the interest rate per annum currently in effect under the Notes shall remain in effect at all times during such period). 12. Additional Mandatory Prepayment of Notes. In the event that, at any time on or after the date hereof, the Parent and/or Newco shall have issued in one or more issuances commencing on the date hereof, equity securities of the Parent of any class or series in exchange for cash in an aggregate amount of $20,000,000 or more, from the date hereof until the one-year anniversary of the date hereof, then the Parent shall promptly give written notice thereof to the Purchaser and the Purchaser shall then have the right, by written notice delivered to the Parent within 30 days after its receipt of such notice, to require the Co-Borrowers thereupon to prepay in respect of the Notes an amount equal in the aggregate to not more than $2,000,000, such amount to be paid and applied in accordance with Sections 2.6, 2.7 and 2.8 of the Purchase Agreement, which right to prepayment shall be in addition to and not in lieu of all other rights of the holders of Notes to prepayment set forth in Section 2.5 and elsewhere in the Purchase Agreement and the Notes. 13. Expenses. Promptly after the date hereof, in accordance with the terms of Section 11.6 of the Purchase Agreement, the Obligors shall reimburse the Purchaser for all reasonable expenses incurred by it in connection with the negotiation, preparation and execution of this letter agreement and the Consent, including, without limitation, the reasonable fees and expenses of Nixon Peabody LLP, in an amount not to exceed $15,000. 14. Obligations Independent. The obligations of the parties hereto under each of Sections 1 through 13 hereof are independent of, and are not conditioned on the performance or fulfillment of, the obligations of the parties under any other of such Sections. 15. Counterparts. This letter agreement may be executed in multiple counterparts, each of which shall constitute an original, but all of which shall constitute one and the same agreement. -4- 16. Governing Law. This letter agreement shall be governed by and construed under the law of the State of New York (other than those conflict of law rules that would defer to the substantive laws of another jurisdiction). If you are in agreement with the foregoing, please so indicate by signing this letter agreement where indicated below and returning a copy hereof to the undersigned. Very truly yours, TECHNOLOGY INVESTMENT CAPITAL CORP. By: ------------------------------------------------ Name: Saul B. Rosenthal Title: President ACCEPTED AND AGREED: ------------------- ADVANCED AESTHETICS, INC. By: ------------------------------------------------ Name: Title: -5- ANUSHKA PBG ACQUISITION SUB, LLC By: ------------------------------------------------ Name: Title: ANUSHKA BOCA ACQUISITION SUB, LLC By: ------------------------------------------------ Name: Title: WILD HARE ACQUISITION SUB, LLC By: ------------------------------------------------ Name: Title: DISCHINO CORPORATION By: ------------------------------------------------ Name: Title: ADVANCED K, LLC By: ------------------------------------------------ Name: Title: -6- EXHIBIT A TERMS OF SERIES F INVESTMENT ISSUER: Advanced Aesthetics, Inc., a Delaware corporation (the "Company"). PURCHASER: Pequot Capital Management or its affiliates ("Investor"). INVESTMENT AMOUNT: $5,000,000. SECURITIES OFFERED: 5,000 shares of Series F Preferred Stock (the "Series F Preferred") and warrants to purchase shares of Common Stock (the "Warrants"). PURCHASE PRICE: $1,000 per share of Series F Preferred. PUBLIC TRANSACTION: Shortly after the closing of this transaction, the Company and all its shareholders (including the Series F Preferred holders) will execute a definitive share exchange agreement or merger agreement (the "Public Transaction") with a to-be-named public company ("Newco") acceptable to the Company. As a result, the Company will become a wholly-owned subsidiary of Newco and all existing and new shareholders of the Company (including the investors in the Series F Preferred) will receive shares of common stock of Newco in exchange for their equity in the Company. For more details see "Public Transaction." LIQUIDATION PREFERENCES: In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series F Preferred (together with the holders of the shares of Series D Preferred Stock of the Company) will receive in preference to the holders of any other class or series of capital stock of the Company, a per share amount equal to the original purchase price of a share of Series F Preferred, plus any accrued and unpaid dividends. DIVIDENDS: 10% per annum dividends, when, as and if declared by the Company's board of directors, prior to any dividends being paid on the common stock of the Company ("Common Stock"). At the time of any conversion of any Series F Preferred into Common Stock, the holder of such Series F Preferred shall be entitled to receive payment of all accrued and unpaid dividends thereon. Such dividends -2- shall be payable, at the option of the holder, either in cash or in the form of such number of additional shares of Common Stock equal to (a) the amount of such dividends, divided by (b) the then applicable conversion price of the Series F Preferred. At the time of any Public Transaction, the holder of any Series F Preferred shall be entitled to receive payment of all accrued and unpaid dividends thereon. Such dividends shall be payable, at the option of the holder, either in cash or in the form of such number of additional shares of common stock of Newco equal to (a) the amount of such dividends, divided by (b) the effective conversion/exchange price in respect of the conversion/exchange of the Series F Preferred into common stock of Newco in such Public Transaction. VOTING RIGHTS: The Series F Preferred will vote with the Common Stock as a class on an as converted basis. Certain transactions will require the consent of the holders of a majority of the Series F Preferred. CONVERSION RIGHTS: The Investor will have the right to convert each share of its Series F Preferred into 400 shares of Common Stock ($2.50/share conversion price). The Series F Preferred will be automatically converted into Common Stock as long as the Public Transaction is effected with Medical Makeover Corporation of America or IGI, Inc. as described in this Memorandum ("Pre-Approved Transactions"). ANTI-DILUTION PROTECTIONS: Proportional adjustments of the Series F Preferred conversion rate will be made for splits, combinations, stock dividends, recapitalizations and the like. Additionally, following the Closing, in the event that the Company shall issue any additional shares of Common Stock or Common Stock equivalents at a issuance price (or deemed issuance price) less than the then effective conversion price of the Series F Preferred, the conversion price for the Series F Preferred shall be subject to a weighted-average anti-dilution adjustment. PROTECTIVE PROVISIONS: Consent of the holders of a majority of the outstanding Series F Preferred shall be required for the consummation of the Public Transaction (other than the Pre-Approved Transactions) or any amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the -3- Series F Preferred. REDEMPTION: Each holder of Series F Preferred shall have the right , but not the obligation, to require the Company to redeem any or all of such holder's Series F Preferred upon the earliest to occur of: (i) the liquidation or dissolution of the Company, (ii) an IPO of the Company, (iii) the sale of all or substantially all the assets of the Company, (iv) a merger, consolidation or business combination of the Company (except for the Public Transaction) and (v) a change of control of the Company and the Company shall have such right as long as the Investor would receive 2x its original investment upon such redemption or in such other transaction. TERMS OF THE WARRANTS: The Company will issue to the Investor a warrant exercisable for the number of shares of Common Stock equal to thirty percent (30%) of the number of shares of Common Stock issuable to the Investor upon conversion of its shares Series F Preferred. The warrants will be exercisable for five (5) years from the date of issuance and will have an exercise price equal to 120% of the Conversion Price ($3.00). PROPOSED CLOSING DATE: On or before July 15, 2005. REGISTRATION RIGHTS: Newco will file a registration statement with the SEC covering the shares of common stock of Newco issued to the holders of the Series F Preferred in connection with the Public Transaction and the shares of common stock of Newco issuable upon exercise of the warrants (collectively, the "Registrable Securities") within 60 days after consummation of the Public Transaction and shall use commercially reasonable efforts to cause such registration statement to be declared effective within 105 days after the consummation of the Public Transaction. In the event that either (i) Newco shall fail to file such registration statement within 60 days of the Public Transaction, (ii) such registration statement shall not be declared effective within 105 days of the Public Transaction or (iii) such registration statement shall not remain continuously effective for a period of at least two years, the Company shall be required to pay liquidated damages to the holders of the Registrable Securities in an amount equal to 1% of the purchase price of the Series F Preferred to which such Registrable Securities relate for each 30-day period -4- during which any such condition exists. REPRESENTATIONS AND WARRANTIES: Customary representations and warranties covering, among other things, capitalization, authority, no conflicts and valid private placement. OTHER CLOSING CONDITIONS: Customary closing conditions, including compliance with blue sky laws, receipt of all necessary corporate and regulatory approvals and investor suitability. EXPENSES: The Company shall pay the out-of-pocket expenses of the Investor in connection with this transaction. (including legal fees and expenses of counsel to the Investor), up to an amount not exceeding $25,000. CONDITIONS PRECEDENT TO FINANCING: This summary of terms is not intended as a legally binding commitment by the Company or the Investor and any obligation on the part of either is subject to the completion of legal documentation and due diligence to the satisfaction of the Investor and the Company. -5-