U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------------------------------------
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to________________
Commission File Number: 0-27833
-------------------------------
INTERNATIONAL COSMETICS MARKETING CO.
(Exact name of small business issuer as specified in its charter)
Florida 65-0598868
------- ----------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
6501 N.W. Park of Commerce Boulevard, Suite 205, Boca Raton, Florida 33487
--------------------------------------------------------------------------
(Address of Principal executive offices)
Issuer's telephone number, including area code: (561) 999-8878
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.)
YES X NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date As of November 10, 2000,
4,785,630 shares of Common Stock are issued and outstanding.
INTERNATIONAL COSMETICS MARKETING CO.
Form 10-QSB for the quarter ended September 30, 2000
TABLE OF CONTENTS AND INFORMATION REQUIRED IN REPORT
- ----------------------------------------------------
Part I
Balance Sheets as of September 30, 2000 and June 30, 2000 1
Statements of Operations for the three months ended 2
September 30, 2000 and 1999
Statements of Changes in Stockholder's Equity for the three months 3
ended September 30, 2000
Statements of Cash Flows for the three months ended 4
September 30, 2000 and 1999
Notes to Financial Statements 6
Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Part II
Legal Proceedings 16
Changes in Securities and Use of Proceeds 16
Defaults upon Senior Securities 16
Submissions of Matters to a Vote of Security Holders 16
Other Information 16
Exhibits and Reports on Form 8-K 16
Signatures 17
Part I. Financial Information
Item 1. Financial Statements
osmetics Marketing Co.
Balance Sheets
As of September 30, 2000 and June 30, 2000
(Unaudited)
September 30, June 30,
2000 2000
----------- -----------
ASSETS
Current Assets:
Cash $ 439,763 $ 4,739
Receivables - credit cards and bank drafts 49,177 58,351
Inventory, net 334,250 499,617
Prepaid expenses and other current assets 41,028 79,654
----------- -----------
Total current assets 864,218 642,361
Office furniture and equipment, net 88,254 96,200
License agreement, net 207,435 210,912
Deposits 126,899 126,899
----------- -----------
Total assets $ 1,286,806 $ 1,076,372
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 584,600 $ 617,116
Accrued liabilities 95,674 117,687
Advances payable to related parties 15,417 100,417
Payable to licensors 18,750 42,000
----------- -----------
Total current liabilities 714,441 877,220
Convertible debentures - stockholder 105,000 105,000
Stockholders' equity:
Preferred Stock, $.001 par value, $2.50 liquidation value, 5,000,000
shares authorized; 221,458 shares issued and outstanding 221 --
Common stock, $.001 par value, 25,000,000
shares authorized; 4,785,630 and 5,145,730 shares
issued and outstanding 4,785 5,146
Additional paid-in capital 2,711,916 2,046,257
Accumulated deficit (2,249,557) (1,957,251)
----------- -----------
Total stockholders' equity 467,365 94,152
----------- -----------
Total liabilities and stockholders' equity $ 1,286,806 $ 1,076,372
=========== ===========
The accompanying notes are an integral part of these financial statements.
1
International Cosmetics Marketing Co.
Statements of Operations
(Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2000 1999
----------- -----------
Net sales $ 699,021 $ --
Cost of sales (256,549) --
----------- -----------
Gross profit 442,472 --
Operating expenses:
Commissions 281,499 --
Royalty 75,000 25,000
Selling, general and administrative 403,474 143,813
----------- -----------
Total operating expenses 759,973 168,813
----------- -----------
Operating loss (317,501) (168,813)
----------- -----------
Other Income
Interest expense (1,280)
Forgiveness of debt 26,475 --
----------- -----------
25,195 --
Provision for income taxes -- --
----------- -----------
Net loss $ (292,306) $ (168,813)
=========== ===========
Net loss per share:
Basic $ (0.06) $ (0.03)
Diluted $ -- $ --
Weighted average common
shares outstanding:
Basic 4,749,208 6,093,785
Diluted 4,749,208 8,332,246
The accompanying notes are an integral part of these financial statements.
2
International Cosmetics Marketing Co.
Statement of Changes in Stockholders' Equity
For The Three Months Ended September 30, 2000
(Unaudited)
Preferred Common Additional Total
Stock Preferred Stock Common Paid-in Accumulated Stockholders'
Shares Stock Shares Stock Capital Deficit Equity
-------- ------- --------- ------- ----------- ------------ ---------
Balances at June 30, 2000 -- $ -- 5,145,730 $ 5,146 $ 2,046,257 $ (1,957,251) $ 94,152
Options issued to certain licensors -- -- 12,126 12,126
Conversion of accounts payable 21,900 21 54,727 54,748
Conversion of advance payable 18,000 18 44,982 45,000
Cancellation of shares at par value (400,000) (400) 400 --
Issuance of preferred stock 200,000 200 -- 499,800 500,000
Conversion of legal fees payable 5,458 5 -- -- 13,640 13,645
Conversion of advance payable 16,000 16 -- -- 39,984 40,000
Net loss (292,306) (292,306)
-------- ------- --------- ------- ----------- ------------ ---------
Balances at September 30, 2000 221,458 $ 221 4,785,630 $ 4,785 $ 2,711,916 $ (2,249,557) $ 467,365
========= ======= ========= ======= =========== ============= =========
The accompanying notes are an integral part of these financial statements.
3
International Cosmetics Marketing Co.
Statements of Cash Flows
(Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2000 1999
--------- ---------
Cash Flows From Operating Activities:
Net loss $(292,306) $(168,813)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation expense 7,946 325
License amortization expense 3,477 1,158
Legal expenses -- 10,000
Consulting expenses 2,083 --
Options issued to certain licensors 12,126 --
Changes in operating assets and liabilities:
Receivables from credit cards and bank drafts 9,174 --
Inventory 165,367 --
Deposits for inventory purchases -- (100,234)
Prepaid expenses and other current assets 38,626 (5,984)
Accounts payable 33,794 20,153
Accrued liabilities (22,013) --
Deferred offering costs -- 9,340
Payable to licensors (23,250) 137,501
--------- ---------
Net cash used in operating activities (64,976) (96,554)
Cash Flows From Investing Activities:
Purchase of office furniture and equipment -- (11,694)
Deposits for services -- (15,984)
Exclusive license agreement -- (200,000)
--------- ---------
Net cash used in investing activities -- (227,678)
Cash Flows from Financing Activities:
Issuance of convertible debentures -- 425,000
Proceeds from issuance of preferred stock 500,000 --
--------- ---------
Net cash provided by financing activities 500,000 425,000
Net increase in cash 435,024 100,768
Cash, beginning of period 4,739 450
--------- ---------
Cash, end of period $ 439,763 $ 101,218
========= =========
The accompanying notes are an integral part of these financial statements.
4
Three Months Three Months
Ended Ended
September 30, September 30,
2000 1999
Supplemental disclosure of cash flow information:
Interest paid during the year $ -- $ --
Income taxes paid during the year $ -- $ --
====== ======
Supplemental Disclosure of Noncash Investing and Financing Activities for the
year ended June 30, 2000:
Options of certain licensors valued at $12,126
21,900 shares of common stock issued for accounts payable at $2.50 per
share
18,000 shares of common stock issued for advance payable to related
parties at $2.50 per share
400,000 shares of common stock cancelled at par value
5,458 shares of preferred stock issued for legal fees payable at $2.50
per share
16,000 shares of preferred stock issued for conversion of advance payable
to related parties at $2.50 per share
5
International Cosmetics Marketing Co.
Notes to Financial Statements (Unaudited)
For the three months ended September 30, 1999 and 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements, which are for interim periods,
do not include all disclosures provided in the annual financial statements.
These unaudited financial statements should be read in conjunction with the
financial statements and the footnotes thereto contained in the Annual Report on
Form 10-KSB for the year ended June 30, 2000 of International Cosmetics
Marketing Co, (the "Company"), as filed with the Securities and Exchange
Commission. The June 30, 2000 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (which are of a normal recurring nature) necessary for a
fair presentation of the financial statements. The results of operations for the
three months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
The Company prepares its financial statements on the accrual basis of
accounting, recognizing income when earned and expenses when incurred.
2. THE COMPANY
International Cosmetics Marketing Co. (the "Company"), d/b/a Beverly Sassoon &
Co., is a direct sales company distributing skin care and nutritional products
through a multi level marketing network in the United States. The Company was in
the development stage from its inception and commenced operations in December
1999.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
that are particularly susceptible to change in the near term include reserves
for excess and obsolete inventory, product returns, and credit card charge
backs.
Revenue Recognition - For financial statement reporting purposes, the Company
recognizes revenue at the time the product is shipped to the Company's
independent business associates.
Product Returns and Credit Card Charge Backs -- Accruals for product returns and
for credit card charge backs are based on industry experience and the Company's
limited experience to date.
Inventories - Inventories are recorded at the lower of cost or market. Cost is
determined by the average method while market is determined by replacement cost
for raw materials and net realizable value for finished goods. Appropriate
consideration is given to deterioration, obsolescence and other factors in
evaluating net realizable value.
Property and Equipment - Property and equipment are recorded on the basis of
historical cost. Depreciation of equipment is computed using the straight-line
method over the assets' estimated
6
useful lives, ranging from 3 years to 5 years. Gain or loss on disposition of
assets is recognized currently. Repairs and maintenance are charged to expense
as incurred. Major replacements and enhancements are capitalized and depreciated
over the remaining useful lives of the assets.
Intangible Assets - Intangible assets consists of a license agreement that was
acquired with cash and common stock. The license agreement is being amortized on
the straight-line basis over 16 years.
Stock Based Compensation - In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting of Stock Based Compensation," which is effective for the
accompanying financial statements of the Company. SFAS 123 requires extended
disclosures of stock based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. Companies are permitted, however,
to apply Accounting Principles Board Opinion No. 25 (APB 25), which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company accounts for its stock based compensation awards to employees under
the provisions of APB 25, and will disclose the required pro forma effect on net
income and earnings per share at such time as options are granted.
Accounting Pronouncements - The Financial Accounting Standards Board has
recently issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." The Interpretation addresses implementation
practice issues in accounting for compensation costs under existing rules
prescribed by APB 25. The new rules are applied prospectively to all new awards,
modifications to outstanding awards and changes in grantee status after July 1,
2000, with certain exceptions. The Company is considering the effects these
changes make and will implement any changes to its plans as deemed appropriate.
4. INVENTORIES
Inventories consist of the following
September 30, 2000 June 30, 2000
------------------ -------------
Finished goods, net of reserve of
$319,977 for excess quantities and
obsolescence $235,470 $400,837
Raw material, principally bottles
and containers 98,780 98,780
-------- --------
$334,250 $499,617
======== ========
5. GOING CONCERN
The Company commenced operations in December 1999, and as reflected in the
accompanying financial statements, the Company has incurred a net loss of
$292,306 for the quarter ended September 30, 2000 and reflects an accumulated
deficit of $2,249,557 through September 30, 2000. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan with regard to this matter encompasses restructuring
operations, introducing new products, improving gross profit margins, and
reducing overhead. During the quarter ended September 30, 2000, the Company
issued convertible preferred stock for cash and settlement of liabilities
aggregating $553,645 (see Note 11). The Company plans to attempt to raise
additional funding in the fourth quarter of 2000.
The eventual outcome of the success of management's plans cannot be ascertained
with any degree of certainty. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
7
6. COMMITMENTS AND CONTINGENCIES
Exclusive License Agreement - On August 19, 1999, the Company entered into an
Exclusive License Agreement with Beverly Sassoon International, LLC (a Florida
limited liability company), Ms. Beverly Sassoon and Mr. Elan Sassoon. The
agreement granted the Company the following rights: 1) an exclusive license to
utilize Ms. Sassoon's name and likeness with the manufacturing, promotion and
sale of certain products, 2) an exclusive license to utilize Mr. Sassoon's name
and likeness with the manufacturing, promotion and sale of certain products, 3)
an exclusive, worldwide license to manufacture, market and distribute certain
skin care products developed by Beverly Sassoon International, LLC, and 4) the
use of her name and likeness in the marketing and promotion of pet care and
slimming products, the exclusive license to utilize Ms. Sassoon's name and
likeness with regards to these types of products. The term of this Exclusive
License Agreement is 99 years, with a 99-year renewal at the Company's option.
The Company will retain full control over the manufacturing, development and
marketing of the Company's products. Also, Ms. Sassoon and Mr. Sassoon, through
Beverly Sassoon International, LLC will consult with the Company in connection
with product development and marketing. As consideration for the rights granted
under this agreement, Beverly Sassoon International, LLC was to be paid
$200,000, including $50,000 for certain expenses, over a period of time and was
issued 900,000 shares of the Company's common stock.
The Company pays Beverly Sassoon International, LLC royalty payments equal to
the greater of 2% of gross revenues from sales of any products that are marketed
or distributed under the terms of the Exclusive License Agreement, or $25,000
per month. These royalty payments will end if Beverly Sassoon, Elan Sassoon
and/or Capital Distributors, LLC, a Florida limited liability company controlled
by Beverly Sassoon and Elan Sassoon exercise certain options to purchase
4,850,000 shares of the Company's common stock. On August 16, 2000, the Company
also entered into an Indemnification Agreement with Beverly Sassoon, Elan
Sassoon, and Capital Distributors, LLC whereby the Company may at its sole
discretion under certain circumstances elect to cancel options to purchase up to
750,000 shares of the Company's common stock.
On October 13, 2000, the Exclusive License Agreement was modified to have the
royalty terminate August 19, 2001. The royalty payment was also modified to
equal the greater of 2% of gross revenues as defined in the Exclusive License
Agreement or $22,750 per month starting October 2000 until such time as the
Company reports positive net cash flow from operating activities for three
consecutive months. Royalties payable of $8,250 and other payables of $16,500
were forgiven by licensors as part of the modification to the Exclusive License
Agreement. On October 13, 2000, the options were modified to be cashless
exercisable options and to be exercisable in whole or in part through August 19,
2019. In connection with the Company's modification of the Exclusive License
Agreement with Beverly Sassoon, Elan Sassoon and Beverly Sassoon International,
LLC, including modification of certain terms of options granted to Beverly
Sassoon, Elan Sassoon and Capital Distributors, LLC, on October 13, 2000, the
estimated value of the options using the Black-Scholes option-pricing model is
approximately $19,000,000. Accordingly, the Company expects a material non-cash
charge to operations in the second quarter of fiscal year 2001.
The Company is in negotiations to further modify the royalty payment formula in
the Exclusive License Agreement.
Leases - The Company has certain non-cancelable operating leases for office
space and office equipment. Rent expense was $18,415 and $4,453 for the periods
ended September 30, 2000 and 1999, respectively.
Contingencies - The Company is subject to governmental regulations pertaining to
product formulation, labeling and packaging, product claims and advertising and
to the Company's direct selling system. Any assertion or determination that
either the Company, or the Company's independent business associates, is not in
compliance with existing statutes, laws, rules, or
8
regulations could potentially have a material adverse effect on the Company's
operations. Additionally, the adoption of new statutes, laws, rules or
regulations or changes in the interpretation of existing statutes, laws, rules
or regulations could have a material adverse effect on the Company and its
operations. Although management believes that the Company is in compliance, in
all material respects with the statutes, laws, rules and regulations of every
jurisdiction in which it operates, no assurance can be given that the Company's
compliance with applicable statutes, laws, rules and regulations will not be
challenged by authorities or that such challenges will not have a material
adverse effect on the Company's financial position or results of operations or
cash flows.
7. RELATED PARTIES
During the quarter ended September 30, 2000, an advance payable to a stockholder
for $45,000 was converted into the Company's common stock at $2.50 per share.
During the quarter ended September 30, 2000, an advance payable to an affiliate
of a stockholder of $40,000 was converted into convertible preferred stock (see
Note 11).
During the quarter ended September 30, 2000, liabilities aggregating $54,749
under a verbal consulting agreement with a stockholder and a related business
associate were converted to 39,900 shares of the Company's common stock at $2.50
per share.
During the quarter ended September 30, 2000, consulting agreements with Hatteras
Investment Company and Viking Holding Company, companies affiliated with a
stockholder, were terminated. The 400,000 shares of the Company's common stock
conditionally issued to these entities in the year ending June 30, 2000 were
returned to the Company and cancelled in September 2000.
Commissions of $46,827 were paid to business associates of the Company who are
immediate family members of the Company's president during the quarter ended
September 30, 2000. Commissions of $5,778 were paid to Capital Distributors,
LLC, an entity controlled by Beverly Sassoon and Elan Sassoon during the quarter
ended September 30, 2000.
Legal expense includes $17,891 and $35,660 for the quarters ended September 30,
2000 and 1999, respectively, from a law firm whose principals and affiliates are
stockholders of the Company. Legal fees of $13,645 of this law firm from prior
to July 1, 2000 were converted into preferred stock in the quarter ended
September 30, 2000 (see Note 11).
Subsequent to September 30, 2000, the Company entered into a consulting
agreement for financial advisory and investment-banking services with an NASD
broker dealer as summarized in Note 12.
8. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes."
SFAS No. 109 requires the recognition of deferred tax liabilities and assets for
temporary differences, operating loss carry-forwards, and tax credit
carry-forwards.
A temporary difference is a difference between the tax basis of an asset or
liability and its reported amount in the financial statements that will result
in taxable or deductible amounts in future years when the asset is recovered or
the liability is settled. Deferred taxes represent the future tax return
consequences of these differences.
The Company has not recognized any benefit of such net operating loss
carry-forwards in the accompanying financial statements in accordance with the
provisions of SFAS No. 109 as the realization of this deferred tax benefit is
not more likely than not. A 100% valuation allowance has been recognized to
offset the entire effect of the Company's net deferred tax assets.
9
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated fair value
of the Company's financial instruments presented in accordance with the
requirements of Statement on Financial Accounting Standards (SFAS) No. 107. Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of September 30, 2000. Since
the reported fair values of financial instruments are based on a variety of
factors that may not represent actual values that could have been realized as of
September 30, 2000 or that will be realized in the future.
The respective carrying value of certain on-balance sheet financial instruments
(cash, accounts receivable, accounts payable and accrued expenses) approximated
their fair values. Fair values were assumed to approximate carrying values for
these financial instruments since they are short term in nature and their
carrying amounts approximate fair values or they are receivable or payable on
demand. The fair value of the long-term 0% convertible debentures payable of
$105,000, based on current market interest rates, is estimated to be $118,000.
10. CONVERTIBLE DEBENTURES - STOCKHOLDER
During the year ended June 30, 2000, the Company issued 0% convertible
debentures to an individual aggregating $2,000,000. In June 2000, the debenture
holder converted $1,895,000 of the debentures to 379,000 shares of the Company's
common stock at $5.00 per share. If the outstanding debenture of $105,000 at
June 30, 2000 is not converted by the debenture holder or paid by the Company on
or before October 26, 2002, the debenture shall be automatically converted. The
debenture provides for adjustment of the conversion price for any stock splits,
stock dividends, corporate reorganizations and certain other corporate
transactions and issuance of securities.
Similar to the restrictive provisions of the convertible preferred stock
discussed in Note 11, the debentures contain restrictive provisions that
significantly limit the authority of the officers and the Board of Directors of
the Company.
11. ISSUANCE OF CONVERTIBLE PREFERRED STOCK AND CHANGE IN CONTROL OF THE COMPANY
On September 27, 2000, the Company entered into a stock purchase agreement with
related parties to issue 221,458 shares of Series A Convertible Preferred Stock
at a stated value of $2.50 per share. The preferred stock has a liquidation
preference of $2.50 per share. For 200,000 of the shares, the Company received
$500,000 ($100,000 of which was received in the period August 16 through
September 1, 2000) from a son of the debenture holder (see Note 10). An advance
payable to an affiliate of a stockholder of $40,000 was converted for 16,000 of
the shares and legal fees payable of $13,645 were converted for 5,458 of the
shares. This preferred stock is convertible into the Company's common stock at
$2.50 per share. The stock purchase agreement provides for adjustment of the
conversion price for any stock splits, stock dividends, corporate
reorganizations and certain other corporate transactions and issuance of
securities. The stock purchase agreement provides the purchasers of the
preferred stock certain registration rights. The preferred stock includes no
dividend.
The preferred stock entitles each such stockholder to seventy-five (75) votes
for each one (1) vote of Common Stock, and shall be entitled to vote together as
a single class with holders of Common Stock, with respect to any question or
matter upon which holders of Common Stock have the right to vote. The preferred
stock also entitles the holders thereof to vote as a separate class.
The stock purchase agreement also requires the Company to obtain the written
approval of the holders of at least a majority of the voting power of the
outstanding shares of preferred stock for the following: 1) sell, convey, or
otherwise dispose of or encumber all or substantially all of its property or
business or merge into or consolidate with any other corporation or effect any
transaction or series of
10
related transactions in which more than fifty percent (50%) of the voting power
of the Company is transferred or disposed of, 2) alter or change the rights,
preferences or privileges of the preferred stock, 3) increase or decrease the
total number of authorized shares of the preferred stock, 4) authorize or issue,
or obligate itself to issue, any other equity security, including any other
security convertible into or exercisable for any equity security having rights,
preferences or privileges over, or being on a parity with or similar to, the
preferred stock, 5) redeem, purchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose) any security of the Company, 6) amend
the Company's Articles of Incorporation or bylaws, 7) change the authorized
number of directors of the Company's board of directors, 8) declare, order or
pay any dividends on any class of securities, 9) adjust the salary of executive
officers, directors, executive level independent contractors and key employees
of the Company, 10) make any capital expenditures in excess of $15,000, 11)
issue new shares of capital, 12) enter into or approve any agreement or contract
for the purchase of goods, services or other items between the Company, a
shareholder or a member of shareholder's immediate family, or 13) make any
commission payment to any independent business associate in excess of $15,000.
The preferred stock is not redeemable without the prior express written consent
of the holders of a majority of the voting power of all then outstanding shares
of the preferred stock. Notwithstanding the foregoing, in the event the holders
of the preferred stock have not converted the preferred stock into common stock
of the Company by September 30, 2005, the Company shall have the option to
redeem the preferred stock at a price of $7.50 per share
12. FINANCIAL ADVISORY AND INVESTMENT BANKING SERVICES CONSULTING CONTRACT
On October 13, 2000, the Company entered into a consulting agreement for
financial advisory and investment banking services with an NASD broker dealer.
Certain principals of the broker dealer are stockholders of the Company,
including the primary convertible preferred shareholder (see Note 11). The
agreement provides a monthly consulting fee of $10,000 plus five-year "cashless
exercise" warrants to purchase 250,000 shares of the Company's common stock at
an exercise price of $2.50 (subject to adjustment in certain events) for which
the broker dealer will have registration rights with respect to the common stock
underlying the warrants. Additionally, the agreement provides for payment of a
transaction fee equal to 1) 5% of the consideration up to $3,000,000, plus 2) 3%
of the consideration from and including $3,000,000 up to $5,000,000, plus 3) 1%
of the consideration including and in excess of $5,000,000 for any merger,
acquisition, strategic partner relationship, etc. In addition to the consulting
fee and transaction fee, the agreement provides for payment of an alternate
transaction fee, subject to a minimum of $25,000, for any joint venture,
marketing agreement, licensing agreement, strategic partner agreement, etc., and
1) in connection with any equity securities financing in a public offering, a
fee to be agreed upon by the Company and the broker dealer; 2) in connection
with any equity securities financing in a private placement, a) a cash fee equal
to 10% of the gross proceeds raised, plus b) a non-accountable expense fee equal
to 3% of the offering price of the securities sold, plus c) the broker dealer
shall have the right to purchase, for $.01 each, "cashless exercise" warrants to
purchase common stock equal to 10% of the number of shares of common stock sold
in equity securities financing. The warrants will have a term of five years and
have an exercise price of 100% of the per share price (or conversion price of
the securities, if applicable) at which the investors invested in connection
with the equity securities financing and will be transferable to broker dealers'
employees and affiliates. The broker dealer shall also be granted registration
rights with respect to the common stock underlying such warrants which will
include at least one demand registration right at the Company's cost and an
unlimited number of piggyback registration rights; 3) in connection with any
debt securities financing, such amount as shall be agreed upon by the Company
and the broker dealer; 4) in connection with any bank financing that is
consummated prior to termination of this agreement in which the broker dealer
acts as arranger, the Company shall pay the broker dealer aggregate arrangement
fees in an amount to be agreed upon, payable on the date of execution of
definitive documentation with respect thereto, which fee shall be in addition to
any fee payable to any affiliate of the broker dealer that may act as agent or a
member of a lending syndicate or otherwise as a participant in any such bank
financing.
11
The term of this agreement is for the three years ending October 12, 2003 and is
renewable by mutual consent. This agreement may not be terminated by either
party during the first 12 months. If within the first 12 months, the Company
completes a financing as a result of which it receives gross proceeds of
$1,000,000 or more (the "Initial Financing"), the Company may not terminate this
agreement prior to the expiration of the term. If the Company does not complete
the Initial Financing, either party may terminate this agreement by giving the
other party at least thirty (30) days prior written notice of such termination,
at which time the Company shall pay the broker dealer all fees earned and all
reasonable expenses incurred.
The agreement provides that the Company agrees to retain the broker dealer on an
exclusive basis in connection with a possible transaction, alternate transaction
or financing for the term of the agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company was incorporated in Florida on July 14, 1995 under the name CindyCo,
Inc. In August 1999, the Company changed its name to International Cosmetics
Marketing Co. (the "Company") and concurrently entered into an agreement with
Beverly Sassoon International, L.L.C., Beverly Sassoon and Elan Sassoon which
grants the Company various rights related to the manufacturing, marketing and
distribution of products utilizing the "Beverly Sassoon" or "Elan Sassoon"
names.
The Company commenced operations in late 1999 as a direct sales company which
develops and distributes a variety of skin care, cosmetics, nutritional and
human wellness products.
RESULTS OF OPERATION
Comparison of the Company's financial information as of September 30, 2000 and
June 30, 2000 and for the three-month periods ended September 30, 2000 and 1999:
Company sales commenced in the fall of 1999 and net sales for the period ended
September 30, 2000 were $699,021.
Gross profit as a percentage of net sales was 63% of net sales for the period
ended September 30, 2000, compared to zero for the period ended September 30,
1999. The increase in gross profit resulted primarily from the Company
commencing operations in the fall of 1999.
Commissions earned by distributors of the Company's products as a percentage of
net sales was 40% for the period ended September 30, 2000, compared to zero for
the prior period. Commissions are earned by the Company's independent business
associates based on group volume. Group volume is a value assigned by the
Company to its products for the purpose of determining commissions to its
independent business associates. Commissions expense was 42% of group volume for
the period ended September 30, 2000.
Royalty expense for the period ended September 30, 2000 was $75,000 and $25,000
for the period ended September 30, 1999. The increase in royalty expense
resulted from the license agreement commencing in September, 1999.
Selling, general and administrative expenses were $403,474 and 58% of net sales
for the period ended September 30, 2000, compared to $143,813 for the period
ended September 30, 1999. The increase in selling, general and administrative
expenses resulted primarily from the Company commencing operations in the fall
of 1999.
Net loss increased by approximately $123,493 for the period ended September 30,
2000 compared to a net loss of $168,813 in the period ended September 30, 1999
due to the Company commencing operations in the fall of 1999. Net loss as a
percentage of net sales was 42% for the period ended September 30, 2000 due to
the Company commencing operations in the fall of 1999.
12
In connection with the Company's modification on October 13, 2000 of the
Exclusive License Agreement with Beverly Sassoon, Elan Sassoon and Beverly
Sassoon International, LLC, including modification of certain terms of options
granted to Beverly Sassoon, Elan Sassoon and Capital Distributors, LLC, the
estimated value of the options using the Black-Schools option-pricing model is
approximately $19,000,000. Accordingly, the Company expects a material non-cash
charge to operations in the second quarter of fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for funds have been for working capital
(principally inventory purchases), commissions, royalty expense, operating
expenses, capital expenditures, and the development of operations for the U.S.
market. The Company has generally relied on cash flow from issuance of
convertible debentures in the amount of $2,000,000, issuance of preferred stock
in the amount of $500,000 and cash collected on sales that commenced in December
1999 to fund operating activities. The Company needs additional funding during
the remainder of the fiscal year to pay liabilities, operating expenses,
restructure operations, purchase inventory, enhance product development and
fulfillment relationships, and to fund expected growth of the Company. The
ability of the Company to manage its working capital is dependent upon
restructuring operations, introducing new products, improving gross profit
margins, reducing overhead, and raising additional funding.
The Company is currently generating negative cash flow from operations since it
only had its first sales in December 1999 after commencing operations in August
1999. The Company does not generally extend credit to distributors but requires
payment by credit card or bank draft prior to shipping of products. This process
eliminates the need for significant accounts receivable from distributors. For
the period ended September 30, 2000, the Company had negative cash flow from
operations of $64,976. This negative cash flow from operations primarily related
to the Company's net loss, reduction of certain payables and a reduction of
accrued liabilities.
As of September 30, 2000, working capital was $149,777 compared to a working
capital deficit of $234,859 as of June 30, 2000. Cash at September 30 and June
30, 2000 was $439,763 and $4,739 respectively.
The Company's independent auditors' report on the financial statements as of
June 30, stated that due to the net loss and accumulated deficit, there is
substantial doubt about the Company's ability to continue as a going concern.
The Company requires additional financing to continue operations of which there
can be no assurance. Management has revised its business plan of marketing and
support for the Company's products and is implementing plans to restructure
operations, introduce new products, improve gross margins, renegotiation of
certain liabilities to suppliers and other vendors, and reduce overhead. The
failure of the Company to secure additional financing would have a material
adverse effect on the Company's business, financial condition, and results of
operations and the Company may have to curtail or cease operations.
The Company had no capital expenditures for the period ended September 30, 2000.
The Company anticipates capital expenditures of $250,000 during this fiscal year
to enhance its infrastructure, including computer systems to accommodate
anticipated future growth. The Company plans to finance these expenditures from
additional debt or equity financing. There is no assurance that the Company can
raise funding for the anticipated capital expenditures.
The Company made no deposits in the quarter ended September 30, 2000. Subsequent
to September 30, 2000, the Company made a deposit of approximately $55,000 for
purchase of inventory.
13
The Company leases office space under a non-cancelable operating lease expiring
October 31, 2004. Minimum future operating lease obligations at September 30,
2000 were $303,471, including $52,783 for the remainder of fiscal year 2001.
SEASONALITY AND CYCLICALTIY
In addition to general economic factors, the direct selling industry is impacted
by seasonal factors and trends such as major cultural events and vacation
patterns.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made above, including those in the Liquidity and Capital
Resources section, herein are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements consist of
any statement other than a recitation of historical fact and be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereon or
comparable terminology. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward looking statements. The Company does not
have a policy of updating or revising forward-looking statements and thus it
should not be assumed that silence by its management over time means that actual
events are bearing out as estimated in such forward looking statements.
14
Part II Other Information
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
15
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
Information in response to the requirements of this Item is disclosed above, in
PART I, , Item 1 under note 11 to the financial statements and Item 2, under the
Liquidity and Capital Resources section.
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule
(B) Reports on Form 8-K:
Current Report on Form 8-K. A current Report on Form 8-K was filed on
October 2, 2000, regarding the changes in registrant's certifying accountant as
of September 26, 2000.
Current Report on Form 8-K. A current report on Form 8-K was filed on
October 6, 2000, regarding the Company entering into a stock purchase agreement
on September 27, 2000.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as duly authorized.
International Cosmetics Marketing Co.
(Registrant)
/s/ Stephanie McAnly /s/ Sonny Spoden
- ------------------------------ ------------------------------
Stephanie McAnly Sonny Spoden
President Chief Financial Officer
Dated: November 14, 2000
17