By  on August 31, 2007

Angela Krivulka spends all her time immersed in the spa world these days, but she's anything but relaxed.

Krivulka purchased the 11-unit spa chain Georgette Klinger from TrueYou.com Inc. in May. Two months later she filed Chapter 11 in the U.S. Bankruptcy Court in Newark, N.J.

Shortly after taking over as chief executive officer of the newly purchased business, Krivulka discovered a host of issues.

Listing the problems in an e-mail, Krivulka wrote, "The 11 spa facilities had suffered from neglect, there was low employee morale, a lack of retail products, minimal marketing, large outstanding payments due to creditors and many internal problems that needed to be corrected immediately."

She added that the company has not yet reached a decision on whether it will seek legal action against TrueYou.com regarding the information it provided during the due diligence phase.

According to Krivulka, her company has obtained a commitment for the financing needed to enable Klinger to operate successfully in Chapter 11, and the company expects to file a restructuring plan within two months.

The company's bankruptcy petition, filed on July 25, listed assets and debts each in the range of $1 million to $100 million. Klinger's list of 20 largest creditors includes Cigna Healthcare, $370,237; NorthPark Partners, $199,951; Allergan, the makers of Botox, $127,747; luxury hair care brand Kérastase Paris, $66,340, and high-end skin care company Innovative Skincare, $65,735.

The company's lawyer, John Sherwood, of the Roseland, N.J.-based law firm Lowenstein Sandler said that Klinger has already made moves to cut costs, including shuttering the chain's Boca Raton, Fla., spa, which he said was not profitable, and bringing its inventory management and product delivery functions in-house. Krivulka, who said currently there aren't plans to close any of the remaining 10 locations, added the new management team has also reduced unnecessary and redundant payroll by 40 percent, trimming its employee count to 360 from 410.

The company's 2006 revenue was $33 million, according to documents provided by the firm's previous owner, TrueYou.com.

TrueYou.com, had big ambitions for the spa business, which it purchased in 2004. The company's then ceo and chairman Richard Rakowski outlined a vision for Klinger — which was renamed Klinger Advanced Aesthetics — that would house all cosmetic and medical services that improve one's appearance — hair care, makeup, nail care, spa treatments and cosmetic dentistry and surgery — under one roof.His intention was to bind the spa business to the medical realm, where results are more measurable and objective. That said, the firm assembled a medical board of experts in their field, namely plastic surgery, cosmetic dentistry and dermatology, and recruited John Hopkins Medicine to consult on the clinical trials for its product line, Cosmedicine, and on protocols used for light cosmetic procedures. Klinger showcased its vision in its two flagship units, located in Chevy Chase, Md., and NorthPark Center in Dallas. The NorthPark Center store is attached to Sephora, which sells Cosmedicine. Industry sources said that in a bid to woo investors the company began funneling the bulk of its resources into these two units — even transferring top-selling aestheticians there to build sales.

In its most recent SEC filing, the previous owner TrueYou.com, which retained the Cosmedicine product business, detailed the hurdles the spa chain posed. The filing states, "Since our inception, we have experienced substantial operating losses and negative cash flow. As of March 31, 2007, we have an accumulated deficit of $86.7 million." Faced with declining revenue and cash flow, TrueYou.com stated that it sold its spa business to focus on Cosmedicine, which is sold in Sephora and Klinger spas and on HSN. The company also has been developing and testing Klinger 360 Degree Best Practices Aesthetics System, a technology designed to allow doctors track outcomes of cosmetic treatments, said Jane Terker, president of Cosmedicine. Reflecting on the business, Terker said, "The spa business has always been challenging, because it requires a lot of capital and good management." She added it also involves overseeing five different businesses, namely hair care, nail care, medical treatments, spa services and retail products.

Krivulka of Klinger said that the decision to file for Chapter 11 was a difficult one but that the company has a plan in place that includes an effort to expand its own product line to high-end hotels and health clubs, and also licensing opportunities. The aim, she said, is to continue the legacy of Georgette Klinger, who opened her first spa in 1941 at 501 Madison Avenue in Manhattan. Krivulka declared, "The goal was not simply to come out of bankruptcy with fewer locations. It was to fix the problems, make all the stores profitable and take Georgette Klinger to the next level."

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