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 March 31, 2001
[ ] 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 May 11, 2001, 5,262,296
shares of Common Stock are issued and outstanding.
INTERNATIONAL COSMETICS MARKETING CO.
Form 10-QSB for the quarter ended Mach 31, 2001
TABLE OF CONTENTS AND INFORMATION REQUIRED IN REPORT
- ----------------------------------------------------
Part I
Condensed Balance Sheet (Unaudited) as of March 31, 2001 1
Condensed Statements of Operations (Unaudited) for the three months
ended March 31, 2001 and 2000 and the nine months ended
March 31, 2001 and 2000 2
Condensed Statement of Changes in Stockholder's Equity (Deficiency)
(Unaudited) for the three months March 31, 2001 3
Condensed Statements of Cash Flows for the nine months ended
March 31, 2001 and 2000 4
Notes to Condensed 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 18
International Cosmetics Marketing Co.
Condensed Balance Sheet
(Unaudited)
March 31,
2001
------------
ASSETS
Current Assets:
Cash $ 43,560
Inventory, net 198,426
Deposits for inventory purchases 106,586
Computer equipment held for resale, net 21,918
Prepaid expenses and other current assets 22,770
------------
Total current assets 393,260
Office furniture and equipment, net 79,070
License agreement, net 200,481
Deposits 126,899
------------
Total assets $ 799,710
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
6% demand notes payable to stockholder, primarily secured $ 475,000
Accounts payable 379,445
Payables to related parties 180,130
Accrued liabilities 31,602
------------
Total current liabilities 1,066,177
Convertible debentures - stockholder 105,000
Stockholders' deficiency:
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; 5,005,630 shares issued
and outstanding 5,005
Additional paid-in capital 23,128,005
Accumulated deficit (23,504,698)
------------
Total stockholders' deficiency (371,467)
------------
Total liabilities and stockholders' deficiency $ 799,710
============
The accompanying notes are an integral part of these
condensed financial statements.
1
International Cosmetics Marketing Co.
Condensed Statements of Operations
(Unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 1,205,157 $ 1,203,941 $ 110,345 $ 747,697
Cost of sales 582,358 551,104 46,485 441,427
------------ ------------ ------------ ------------
Gross profit 622,799 652,837 63,860 306,270
Operating expenses:
Commissions 488,908 295,824 47,735 171,709
Royalty and other expense - licensors 214,909 175,000 73,429 75,000
Distributor events -- 181,423 -- 181,423
Stock options - licensors and employee 20,144,125 36,650 150,000 36,650
Selling, general and administrative 1,182,582 1,168,205 357,357 683,702
------------ ------------ ------------ ------------
Total operating expenses 22,030,524 1,857,102 628,521 1,148,484
------------ ------------ ------------ ------------
Operating loss (21,407,725) (1,204,265) (564,661) (842,214)
------------ ------------ ------------ ------------
Other income (expense):
Forgiveness of debt 51,225 -- -- --
Interest expense (4,162) -- (2,882) --
Loss on disposal of fixed assets (186,784) -- (186,784) --
------------ ------------ ------------ ------------
(139,721) -- (189,666) --
------------ ------------ ------------ ------------
Loss before income taxes (21,547,446) (1,204,265) (754,327) (842,214)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $(21,547,446) $ (1,204,265) $ (754,327) $ (842,214)
============ ============ ============ ============
Net loss per share:
Basic $ (4.44) $ (0.24) $ (0.15) $ (0.18)
Diluted $ -- $ -- $ -- $ --
Weighted average common
shares outstanding:
Basic 4,852,980 4,991,588 4,868,834 4,760,720
Diluted 4,852,980 4,991,588 4,868,834 4,760,720
The accompanying notes are an integral part of these
condensed financial statements.
2
International Cosmetics Marketing Co.
Condensed Statements of Changes in Stockholders' Equity (Deficiency)
For The Three Months Ended March 31, 2001
(Unaudited)
Total
Preferred Common Additional Stockholders'
Stock Preferred Stock Common Paid-in Accumulated Equity
Shares Stock Shares Stock Capital Deficit (Deficiency)
------ ----- ------ ------ ------- ------- -----------
Balances at December 31, 2000 221,458 $ 221 4,865,630 $ 4,865 $ 22,900,595 $(22,750,371) $ 155,310
Issuance of Common Stock at $3.00
per share, net of issuing costs -- -- 30,000 30 77,520 -- 77,550
Change in issuance of common stock
from $3.00 to $1.50 per share -- -- 110,000 110 (110) -- --
Stock options - employee -- -- -- -- 150,000 -- 150,000
Net loss -- -- -- -- -- (754,327) (754,327)
-------- -------- ---------- ------- ------------ ------------ ----------
Balances at March 31, 2001 221,458 $ 221 5,005,630 $ 5,005 $ 23,128,005 $(23,504,698) $ (371,467)
======== ======== ========== ======= ============ ============ ==========
The accompanying notes are an integral part of these
condensed financial statements.
3
International Cosmetics Marketing Co.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Nine Months
Ended Ended
March 31, March 31,
2001 2000
------------ ------------
Cash Flows From Operating Activities:
Net loss $(21,547,446) $ (1,204,265)
Adjustments to reconcile net loss to net cash used
in operations:
Loss on disposal of fixed assets 186,784 --
Depreciation expense 23,839 8,226
License amortization expense 10,431 8,112
Provision for inventory obsolescence 145,902 --
Consulting and legal expense 2,083 12,488
Stock options 20,144,125 36,650
Changes in operating assets and liabilities:
Receivables from credit cards and bank drafts 58,351 (61,232)
Inventory 447,093 (746,663)
Deposits for inventory purchases (106,586) (224,888)
Fixed assets held for resale (21,918) --
Prepaid expenses and other current assets 56,884 (27,082)
Accounts payable (278,166) 567,965
Payable to related parties 79,713 40,000
Payable to licensors (42,000) 37,500
Accrued liabilities (86,085) (9,340)
------------ ------------
Net cash used in operating activities (926,996) (1,562,529)
Cash Flows From Investing Activities:
Purchase of office furniture and equipment (193,493) (88,544)
Deposits for services -- (128,274)
License agreement -- (200,000)
------------ ------------
Net cash used in investing activities (193,493) (416,818)
Cash Flows from Financing Activities:
Proceeds from issuance of notes payable to stockholder 475,000 --
Proceeds from issuance of common stock, net of issuance costs 184,310 400
Proceeds from issuance of preferred stock 500,000 --
Issuance of convertible debentures -- 2,000,000
------------ ------------
Net cash provided by financing activities 1,159,310 2,000,400
Net increase in cash 38,821 21,053
Cash, beginning of period 4,739 450
------------ ------------
Cash, end of period $ 43,560 $ 21,503
============ ============
The accompanying notes are an integral part of these
condensed financial statements.
4
International Cosmetics Marketing Co.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Nine Months
Ended Ended
March 31, March 31,
2001 2000
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid $ 1,280 $ --
Income taxes paid $ -- $ --
Supplemental Disclosure of Noncash Investing and Financing
Activities for the nine months ended March 31, 2001:
Stock options issued to certain licensors valued at $19,981,999.
Options of certain licensors valued at $12,126
Call options granted on previously issued options to employee
valued at $150,000
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 previously issued conditionally
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
Supplemental Disclosure of Noncash Investing and Financing
Activities for the nine months ended March 31, 2000:
900,000 shares of common stock issued in acquisition of license
agreement valued at $22,500
28,200 shares of common stock issued for legal services valued
at $10,000
400,000 shares of common stock issued conditionally for
consulting services valued at $10,000
18,800 shares of common stock cancelled at par value
7,330 shares of common stock issued to distributors at $36,650
The accompanying notes are an integral part of these
condensed financial statements.
5
Part I. Financial Information
Item 1. Condensed Financial Statements
International Cosmetics Marketing Co.
Notes to Condensed Financial Statements (Unaudited)
For the three months ended March 31, 2001 and 2000 and nine months ended March
31, 2001 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 condensed financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB of Item 310b of Regulation S-B. 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.
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 March 31, 2001 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., entered into the distribution of skin care and nutritional products to the
public through its web site subsequent to March 2001. The Company was in the
development stage from its inception and commenced operations in December 1999
as a direct sales company distributing its products through network marketing
which distribution was terminated in the quarter ended March 31, 2001. The
Company plans to leverage its brand name through mass merchandising of its
products, publishing, e commerce and licensing.
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, credit card charge backs,
and computer equipment held for resale.
Revenue Recognition - The Company recognizes revenue at the time the product is
shipped to the Company's customers.
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
6
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 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.
4. GOING CONCERN AND CHANGE IN NATURE OF BUSINESS
The Company commenced operations in December 1999, and as reflected in the
accompanying financial statements, the Company has a working capital deficiency
of $672,917 as of March 31, 2001, has incurred a loss of $1,403,321 before a
non-cash expense of $20,144,125 for stock options issued to certain licensors
and an employee in the nine months ended March 31, 2001, and has a stockholders'
deficiency of $371,467 as of March 31, 2001. The Company began experiencing
significantly declining monthly sales beginning in the quarter ended December
31, 2000 due principally to the Company's planned changes in its network
marketing operations, including moving its fulfillment center from California to
Florida, delays in the delivery of products, and plans to change the
compensation plan for its independent business associates. In March 2001, the
Company terminated its network marketing operations.
The Company plans to operate with minimal level of overhead costs for the
remainder of fiscal 2001 and to generate product sales in the quarter beginning
July 1, 2001 through mass merchandising, e commerce, publishing, and licensing
leveraging its brand name. Sales through e commerce are expected to be minimal
for the remainder of fiscal year June 30, 2001. The Company has sold stock for
proceeds of $100,000 subsequent to March 31, 2001 and plans to attempt to raise
additional funding in the remainder of fiscal year June 30, 2001.
The eventual outcome of the success of management's plans cannot be ascertained
with any degree of certainty. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
5. COMMITMENTS AND CONTINGENCIES
Exclusive worldwide license agreement - On August 19, 1999, the Company entered
into an exclusive worldwide license agreement with Beverly Sassoon
International, LLC (a Florida limited liability company), Ms. Beverly Sassoon
and Mr. Elan Sassoon. The agreement was modified in October 2000 and amended in
March 28, 2001. The agreement grants the Company the following rights: 1) an
exclusive license to utilize Ms. Sassoon's name and likeness with the
7
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 retains 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.
Under the amended agreement, the Company pays Beverly Sassoon International, LLC
a royalty which is the greater of (i) $68,250 for each fiscal quarter in six
equal installments on the 1st and 15th of each month or (ii) a payment within 5
days after the Company files its quarterly and annual financial statements with
the Securities and Exchange Commission equal to (A) 2% of estimated annual gross
revenue (as defined) up to $22,500,000, plus (B) 1.25% of estimated annual gross
revenues from $22,500,000 up to $45,000,000, plus (C) .75% of estimated annual
gross revenues exceeding $45,000,000. Notwithstanding the foregoing the minimum
payment shall be automatically increased to $75,000 for each fiscal quarter in
which the Company reports net income before depreciation and income taxes. Under
the amended agreement, the royalty payment termination date of August 19, 2001
was changed to the period of the Exclusive License Agreement.
Leases - The Company has certain non-cancelable operating leases for its
corporate office space and office equipment. Rent expense was $39,390 and
$18,861 for the three months ended March 31, 2001 and 2000, respectively, and
$76,117 and $38,613 for the nine months ended March 31, 2001 and 2000,
respectively. In March 2001 the Company terminated a lease for warehouse and
office space that had been entered into in December 2000.
Software license agreement commitment - In December 2000, Company entered into a
software license agreement for software for its sales, commissions, inventory,
and customer service systems. In the quarter ended March 31, 2001, the Company
cancelled the agreement. The Company believes a refund is due while the vendor
contends that $37,566 remains payable.
Employment agreement - Effective April 2, 2001, the Company entered into a three
year employment agreement with Sam A. Lazar to be President and Chief Operating
Officer of the Company. The agreement may be renewed for an additional year and
provides for an annual base salary of $120,000. The base salary will be
increased to $140,000 per year at such time as the Company reports net income
for a fiscal quarter. Additionally, the agreement grants Mr. Lazar incentive
stock options in accordance with the Company's 1997 Stock Option Plan to
purchase 150,000 shares of the Company's common stock exercisable at $1.50 per
share vesting in 50,000 increments on each annual employment anniversary date.
Contingencies - On November 7, 2000, a lawsuit was filed against the Company,
its licensors (Beverly Sassoon International, LLC ("BSI") and Beverly Sassoon),
and others. The complaint alleges, among other things, that the Company is a
successor in interest to BSI and that BSI and other defendants fraudulently
induced an elderly investor to loan $150,000 to BSI prior to the time of the
Company's license agreement or association with BSI, Ms. Beverly Sassoon and Mr.
Elan Sassoon. The complaint alleges breach of contract, fraud, financial abuse
of an elderly adult and conspiracy. Damages in excess of $150,000 and punitive
damages are being sought. The Company believes that it has meritorious defenses
against the claims. No provision for loss regarding these claims has been
recorded in the accompanying financial statements.
In the quarter ended March 31, 2001, the Company was sued by a computer
equipment vendor. Subsequent to March 31, 2001, the Company entered into a
stipulation with the vendor to pay the vendor $16,842 on April 30, May 15, and
June 1, 2001.
8
6. RELATED PARTIES
Legal expense includes $18,201 and $9,877 for the quarters ended March 31, 2001
and 2000, respectively, and $63,738 and $56,415 for the nine months ended March
31, 2001 and 2000, respectively, from a law firm whose principals and affiliates
are stockholders of the Company.
The Company has an Indemnification Agreement with Beverly Sassoon, Elan Sassoon,
and Capital Distributors, LLC, an entity controlled by Beverly Sassoon and Elan
Sassoon, whereby certain stock options to purchase the Company's common stock
held by these parties can be cancelled by the Company under certain
circumstances. On February 8, 2001, the Indemnification Agreement was amended to
reduce the options subject to indemnification to 200,000 shares of the Company's
common stock.
On October 13, 2000, the Company entered into a consulting agreement for
financial advisory and investment-banking services with an NASD broker dealer as
summarized in Note 10. Under this agreement, consulting expense of $30,000 was
incurred in the quarter and $60,000 for the nine months ended March 31, 2001.
Additionally, on November 22, 2000, the Company entered into a Placement Agent
Agreement with this NASD broker dealer in connection with the planned sale of
stock. Under the agreement, the Company pays a fee equal to ten percent of the
price of each share sold by or through the placement agent and an expense
allowance equal to three percent of the gross proceeds of stock sold. In
connection with shares of common stock sold for $90,000 and $330,000 in the
quarter and nine months ended March 31, 2001, respectively, the Company incurred
fees and expenses to the placement agent of $11,700 and $42,900, respectively,
which have been charged against additional paid-in capital.
In November 2000, Ms. Beverly Sassoon, Mr. Elan Sassoon, and Capitol
Distribution, LLC, a company controlled by Beverly Sassoon and Elan Sassoon,
granted call options to the Chief Executive Officer and three employees hired by
the Company on options the Company had previously granted to Capitol
Distribution, LLC. The call options were for 550,000 shares of the Company's
common stock at $1.50 per share. Upon the resignation of the Chief Executive
Officer and the three employees in the quarter ended March 31, 2001, the call
options were cancelled except for options for 40,000 shares of the Company's
common stock. Expense of $150,000 was recorded for these options and added to
additional paid paid-in capital. The call options are exercisable for the period
through March 15, 2004. The Company has granted registration rights for the call
options in certain public offerings of its equity securities. The Company is not
required to file a registration statement registering the call option shares if
the call option shares may be sold pursuant to Rule 144 of the Securities
Exchange Act.
In December 2000 a preferred stockholder loaned the Company $50,000 pursuant to
a 6% unsecured demand note. In the quarter ended March 31, 2001, this
stockholder loaned the Company $425,000 pursuant to a series of 6% demand notes
under a security agreement. Under the security agreement, the notes are secured
by all assets of the Company. Subsequent to March 31, 2001, this stockholder
loaned the Company an additional $25,000 under the security agreement.
7. 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.
9
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.
8. 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 9, the debentures contain restrictive provisions that
significantly limit the authority of the officers and the Board of Directors of
the Company.
9. CONVERTIBLE PREFERRED STOCK AND 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. 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 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.
10
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 December 31, 2005, the Company shall have the option to redeem
the preferred stock at a price of $7.50 per share
10. 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 9). 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.
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.
11. ISSUANCE OF COMMON STOCK
In December 2000 and January 2001 the Company issued 80,000 and 30,000 shares of
common stock, respectively, at $3.00 per share. Upon closing of the offering in
11
stock from $3.00 per share to $1.50 per share by issuing the purchasers of the
stock an additional 110,000 shares.
In the period April 20 through May 3, 2001, the Company issued 66,666 shares of
common stock at $1.50 per share.
On April 2, 2001, the Company entered into a public relations, promotional and
marketing services agreement for the three months ending June 30, 2001.
Compensation under the agreement is $2,500 per month and up to 240,000 shares of
common stock of the Company of which 50,000 shares are to be furnished by
certain shareholders of the Company. The Company is to register a portion of the
shares of common stock as soon as reasonably possible. The agreement may be
cancelled by either party with thirty days written notice. If the agreement is
cancelled, a pro rata portion of the common stock will be returned to the
Company for cancellation
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 entered into the distribution of skin care and nutritional products
to the public through its web site in April 2001. The Company was in the
development stage from its inception and commenced operations in December 1999
as a direct sales company distributing its products through network marketing
which distribution was terminated in the quarter ended March 31, 2001. The
Company plans to leverage its brand name through mass merchandising of its
products, publishing, and licensing.
RESULTS OF OPERATION
Comparison of the Company's financial information as of March 31, 2001 and for
the three months ended March 31, 2001 and 2000 and the nine months ended March
31, 2001 and 2000:
Company sales commenced December 1999 and net sales for the three months ended
March 31, 2001 and 2000 were $110,345 and $747,697, respectively, and $1,205,157
and $1,203,941 for the nine months ended March 31, 2001 and 2000, respectively.
The Company began experiencing significantly declining monthly sales beginning
in the quarter ended December 31, 2000 due principally to the Company's planned
changes in its network marketing operations, including moving its fulfillment
center from California to Florida, delays in the delivery of products, and plans
to change the compensation plan for its independent business associates. In
March 2001, the Company terminated its network marketing operations.
Gross profit as a percentage of net sales was 58% of net sales for the quarter
ended March 31, 2001, compared to 41% for the quarter ended March 31, 2000, and
52% for the nine months ended March 31, 2001, compared to 54% for the nine
months ended March 31, 2000. The decrease in gross profit resulted primarily
from the Company beginning operations in December 1999 and a charge for
estimated obsolete and excess inventory in the quarter ended December 31, 2000.
Commissions earned by distributors of the Company's products, as a percentage of
net sales was 43% and 23% for the quarters ended March 31, 2001 and 2000,
respectively and 41% for the nine months ended March 31, 2001, compared to 25%
for the nine months ended March 31, 2000. The increase in commissions as a
percentage of net sales resulted primarily from the sale of less non
commissionable items such as sales aids and that the month of December 1999 was
the Company's commencement of operations.
12
Royalty and other related expense was $73,429 and $75,000 for the three months
ended March 31, 2001 and 2000, respectively, and $214,909 and $175,000 for the
nine months ended March 31, 2001 and 2000, respectively. The changes in royalty
expense resulted from the royalty agreement commencing in September 1999 and
from a modification of the license agreement in October 2000.
Selling, general and administrative expenses were $357,357 and 324% of net sales
for the quarter ended March 31, 2001, compared to $683,702 for the three months
ended March 31, 2000, and $1,182,582 and $1,168,205 for the nine months ended
March 31, 2001 and 2000, respectively. The increase in selling, general and
administrative expenses resulted primarily from reduction of overhead as part of
the termination of the Company's network marketing operations.
Loss on disposal of fixed assets of $188,784 in the quarter ended March 31, 2001
resulted from a write off of software licenses, software, computer equipment,
and leasehold improvements relating to the Company's termination of its network
marketing operations.
Net loss decreased by approximately $87,887 for the quarter ended March 31, 2001
compared to a net loss of $842,214 in the quarter ended March 31, 2000
principally as a result of reductions in commissions and selling, general and
administrative expenses as a result of declining sales and termination of the
Company's network marketing operations offset by a loss of $181,784 on disposal
of fixed assets. Net loss as a percentage of net sales was 683% for the quarter
ended March 31, 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, issuance of common stock in the amount of $330,000 in
the period December, 2000 through January 2001 and $100,000 in the period April
20 through May 3, 2001, cash collected on sales that commenced in December 1999
to fund operating activities, and loans from a stockholder ($475,000 in December
2000 through March 31, 2001 and $25,000 in April 2001). The Company needs
additional funding during the remainder of the fiscal year to pay liabilities,
some of which are delinquent, operating expenses, make operational changes,
purchase inventory, enhance product development and fulfillment relationships.
The ability of the Company to manage its working capital is dependent upon
maintaining a minimal level of overhead costs while leveraging its brand name to
develop product sales through a plan of mass merchandising of products, e
commerce, publishing, and licensing The Company plans to attempt to raise
additional funding in the remainder of fiscal year June 30, 2001. The Company
expects to have minimal sales for the quarter ending June 30, 2001 and is
dependent on raising additional funding.
The Company is currently generating negative cash from operations. For the nine
months ended March 31, 2001, the Company had negative cash flow from operations
of $926,996 . This negative cash flow from operations primarily related to the
Company's net loss, increase in deposits for inventory purchases, reduction of
certain liabilities and a reduction in sales.
As of March 31, 2001, working capital deficit was $672,917. Cash at March 31,
2001 was $43,560
The Company's independent auditors' report on the financial statements as of
June 30, 2000 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 operating of which there
can be no assurance. The ability of the Company to manage its working capital is
dependent upon implementing its plans to modify its network marketing business
with a minimal level of overhead costs as well as other product sales increases,
including leveraging its brand name through mass merchandising of products,
publishing, and licensing. The Company plans to attempt to raise additional
13
funding in the remainder of fiscal year June 30, 2001. 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 capital expenditures of $215,411 for the quarter ended March 31,
2001. The Company anticipates minimal, if any, capital expenditures during the
remainder of the fiscal year. At March 31, 2001, the Company has deposits of
$106,586 for the purchase of inventory.
The Company leases office space under a non-cancelable operating lease expiring
October 31, 2004. Minimum future operating lease obligations at March 31, 2001
were $268,553, including $17,594 for the remainder of fiscal year 2001.
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
On November 7, 2000, a complaint was filed against the company and other
defendants in the Superior Court of the State of California for the County of
Santa Barbara (Case No. 01037203 - Ann Pennock Marshall v. Beverly Sassoon
International, LLC; Beverly Sassoon & Company; Beverly Sassoon, individually;
Paul Lambert; and Michelle Spitz). The complaint alleges that Beverly Sassoon
International, LLC ("BSI") and other defendants involved with BSI fraudulently
induced an elderly investor to loan $150,000 to BSI when BSI never intended to
pay the loan. The complaint alleges claims for breach of contract, fraud,
financial abuse of an elderly adult and conspiracy. The complaint alleges, among
other things that the Company is the successor in interest to BSI and is
therefore liable to the Plaintiff. Damages in excess of $150,000 and punitive
damages are being sought. The Company is vigorously contesting its involvement
and liability in this lawsuit.
On February 26, 2001, the Company was sued by a computer equipment vendor.
Subsequent to March 31, 2001, the Company entered into a stipulation with the
vendor to pay the vendor $16,842 on April 30, May 15, and June 1, 2001.
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 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
16
Item 6 Exhibits and Reports on Form 8-K
The following documents are filed as a part of this report or are incorporated
by reference to previous filings if so indicated.
EXHIBIT NO. DESCRIPTION
10(a) Security Agreement dated February 6, 2001 by and between
International Cosmetics Marketing Co. and Nico P. Pronk
10(a)(1) Secured Promissory Note for $200,000 dated February 6, 2001
by and between International Cosmetics Marketing Co. and
Nico P. Pronk
10(a)(2) Secured Promissory Note for $25,000 dated February 28, 2001
by and between International Cosmetics Marketing Co. and
Nico P. Pronk
10(a)(3) Secured Promissory Note for $100,000 dated March 12, 2001 by
and between International Cosmetics Marketing Co. and
Nico P. Pronk
10(a)(4) Secured Promissory Note for $100,000 dated March 28, 2001 by
and between International Cosmetics Marketing Co. and Nico
P. Pronk
10(a)(5) Secured Promissory Note for $25,000 dated April 12, 2001 by
and between International Cosmetics Marketing Co. and Nico
P. Pronk
10(b) Amendment to Exclusive License Agreement dated March 28,
2001 by and between International Cosmetics Marketing Co.
and Beverly Sassoon, Elan Sassoon, and Beverly Sassoon
International, LLC. Exhibit A, Exclusive License Agreement,
dated August 19, 1999 was previously filed
10(c) Employment Agreement dated March 21, 2001, effective as of
April 2, 2001, by and between International Cosmetics
Marketing Co. and Sam A. Lazar
Current Report on Form 8-K. Current Report on Form 8-K was filed on March 19,
2001 regarding (i) the Company's termination of its network marketing business
and new focus on leveraging its brand name through mass merchandising of
products, publishing, e commerce, and licensing, (ii) resignation of Stephanie
McAnly as President and Director as of February 28, 2001, (iii) resignation of
Menderes Akdag as Chief Executive Officer and Director as of March 15, 2001.
17
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/ Sam A. Lazar /s/ Sonny Spoden
- ------------------------------- ------------------------------
Sam A. Lazar Sonny Spoden
President and Chief Operating Chief Financial Officer
Officer
Dated: May 14, 2001
18