U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
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[ ] 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
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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
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(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 February 15, 2001,
4,905,630 shares of Common Stock are issued and outstanding.
INTERNATIONAL COSMETICS MARKETING CO.
Form 10-QSB for the quarter ended December 31, 2000
TABLE OF CONTENTS
AND
INFORMATION REQUIRED IN REPORT
Part I
Condensed Balance Sheet (Unaudited) as of December 31, 2000 1
Condensed Statements of Operations (Unaudited) for the three months
ended December 31, 2000 and 1999 and the six months ended
December 31, 2000 and 1999 2
Condensed Statement of Changes in Stockholder's Equity (Unaudited)
for the three months 3
ended December 31, 2000
Condensed Statements of Cash Flows for the six months ended 4
December 31, 2000 and 1999
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 17
In the fourth quarter ending June 30, 2001. the Company made an adjustment to
record a net reduction of $19,074,873 in expenses and additional paid-in capital
in the quarter ended December 31, 2000 relating to stock options and warrants
utilizing the Black-Scholes option pricing model. This Form 10-QSB/A reflects
this adjustment.
Part I. Financial Information
Item 1. Condensed Financial Statements
International Cosmetics Marketing Co.
Condensed Balance Sheet
(Unaudited)
December 31,
2000
-----------
ASSETS
Current Assets:
Cash $ 73,662
Receivables - credit cards and bank drafts 88,257
Inventory, net 95,601
Deposits for inventory purchases 94,983
Prepaid expenses and other current assets 34,936
-----------
Total current assets 387,439
Office furniture and equipment, net 204,582
License agreement, net 203,959
Deposits 136,633
-----------
Total assets $ 932,613
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
6% demand note payable to stockholder 50,000
Accounts payable 435,006
Payables to related parties 117,348
Payable to licensors 11,375
Accrued liabilities 58,557
-----------
Total current liabilities 672,286
Convertible debentures - stockholder 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; 4,865,630 and 5,145,730 shares
issued and outstanding 4,866
Additional paid-in capital 3,825,722
Accumulated deficit (3,675,482)
-----------
Total stockholders' equity 155,327
-----------
Total liabilities and stockholders' equity $ 932,613
===========
The accompanying notes are an integral part of
these condensed financial statements.
1
International Cosmetics Marketing Co.
Condensed Statements of Operations
(Unaudited)
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net sales $ 1,094,812 $ 456,244 $ 395,790 $ 456,244
Cost of sales 535,873 109,677 279,324 109,677
----------- ----------- ----------- -----------
Gross profit 558,939 346,567 116,466 346,567
Operating expenses:
Commissions 441,173 124,115 159,674 124,115
Royalty and other expense - licensors 141,480 100,000 66,480 75,000
Stock options and warrants 919,252 -- 907,126 --
Selling, general and administrative 826,498 484,503 433,860 340,690
----------- -----------
Total operating expenses 2,328,403 708,618 1,567,140 539,805
----------- -----------
Operating loss (1,769,455) (362,051) (1,450,674) (193,238)
----------- ----------- ----------- -----------
Other Income
Forgiveness of debt 51,225 -- 24,750 --
----------- ----------- ----------- -----------
Loss before income taxes (1,718,230) (362,051) (1,425,924) (193,238)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $(1,718,230) $ (362,051) $(1,425,924) $ (193,238)
=========== =========== =========== ===========
Net loss per share:
Basic $ (0.36) $ (0.11) $ (0.30) $ (0.04)
Diluted $ -- $ -- $ -- $ --
Weighted average common shares outstanding:
Basic 4,773,665 3,421,985 4,796,690 4,778,200
Diluted 4,773,665 3,421,985 4,796,690 4,778,200
The accompanying notes are an integral part of
these condensed financial statements.
2
International Cosmetics Marketing Co.
Condensed Statements of Changes in Stockholders' Equity
(Unaudited)
Preferred Common Additional Total
Stock Preferred Stock Common Paid-in Accumulated Stockholders'
Shares Stock Shares Stock Capital Deficit Equity
------ ----- ------ ----- ------- ------- ------
Balances at September 30, 2000 221,458 $ 221 4,785,630 $ 4,785 $ 2,711,916 $(2,249,558) $ 467,365
Issuance of Common Stock 80,000 80 206,680 206,760
at per share, net of
$3.00 issuing costs
Stock options and warrants 907,126 907,126
Net loss (1,425,924) (1,425,924)
-------- ------- ---------- --------- ----------- ----------- -----------
Balances at December 31, 2000 221,458 $ 221 4,865,630 $ 4,865 $ 3,825,722 $(3,675,482) $ 155,327
======== ======= ========== ========= =========== =========== ===========
The accompanying notes are an integral part of
these condensed financial statements.
3
International Cosmetics Marketing Co.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Six Months
Ended Ended
December 31, December 31,
2000 1999
----------- -----------
Cash Flows From Operating Activities:
Net loss $(1,718,230) $ (362,051)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation expense 15,892 3,726
License amortization expense 6,954 4,635
Provision for inventory obsolescence 141,002 --
Consulting and legal expense 2,083 12,083
Stock options and warrants 919,252 --
Changes in operating assets and liabilities:
Receivables from credit cards and bank drafts (29,906) (144,839)
Inventory 263,014 (303,226)
Deposits for inventory purchases (94,983) (374,756)
Prepaid expenses and other current assets 44,718 (26,310)
Accounts payable (30,801) 204,430
Payable to related parties 16,931 --
Payable to licensors (30,625) 75,002
Accrued liabilities (59,130) 25,291
----------- -----------
Net cash used in operating activities (553,829) (886,015)
Cash Flows From Investing Activities:
Purchase of office furniture and equipment (124,274) (64,090)
Deposits for services (9,734) (81,739)
License agreement -- (200,000)
----------- -----------
Net cash used in investing activities (134,008) (345,829)
Cash Flows from Financing Activities:
Proceeds from issuance of note payable to stockholder 50,000 --
Proceeds from issuance of common stock, net of issuance costs 206,760 --
Proceeds from issuance of preferred stock 500,000 --
Issuance of convertible debentures -- 1,550,000
----------- -----------
Net cash provided by financing activities 756,760 1,550,000
Net increase in cash 68,923 318,156
Cash, beginning of period 4,739 450
----------- -----------
Cash, end of period $ 73,662 $ 318,606
=========== ===========
The accompanying notes are an integral part of
these condensed financial statements.
4
International Cosmetics Marketing Co.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Six Months
Ended Ended
December 31, December 31,
2000 1999
Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
Supplemental Disclosure of Noncash Investing and Financing Activities:
For the six months ended December 31, 2000:
Stock option expense related to licensors of $24,252
Warrant expense for investment banking services valued at $895,000
For the six months ended December 31, 1999:
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
The accompanying notes are an integral part of
these condensed financial statements.
5
International Cosmetics Marketing Co.
Notes to Condensed Financial Statements (Unaudited)
For the three months ended December 31, 2000 and 1999 and six months ended
December 31, 2000 and 1999
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.
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 December 31, 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 (see Note 4). 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.
6
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 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 for 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 $284,847 as of December 31, 2000, has incurred a loss of $1,425,924 for the
quarter ended December 31, 2000, and has stockholders' equity of only $155,327
as of December 31, 2000. The Company experienced declining monthly sales in the
quarter ended December 31, 2000. In the period January 1 through February 15,
2001, sales continued to decline to minimal amounts. The decline in sales is
attributed to the Company's 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.
As a result of the decline in sales, management is currently evaluating its
network marketing operations and its plans with regard to this matter
encompasses modifying 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 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 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
7
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. 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 Distribution, 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 Distribution, 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 November 2000, Ms. Beverly Sassoon, Mr. Elan Sassoon, and Capitol
Distribution, LLC granted call options on their options from the Company to
certain employees of the Company. The call options are for 550,000 shares of the
Company's stock at $1.50 per share (see Note 6).
Leases - The Company has certain non-cancelable operating leases for its
corporate office space and office equipment. Rent expense was $18,311 and
$15,498 for the quarters ended December 31, 2000 and 1999, respectively, and
$36,726 and $19,952 for the six months ended December 31, 2000 and 1999,
respectively. Additionally, the Company has entered into a non-cancelable
operating lease for warehouse and office space for the twenty-five months ending
January 31, 2003 at a monthly rental of $9,734. The company is seeking
opportunities to sublease certain of its leased space.
Software license agreement commitment - The Company has entered into a software
license agreement for software for its sales, commissions, inventory, and
customer service systems for a cost of $155,000 of which approximately $83,000
has been paid and recorded as part of fixed assets as of December 31, 2000.
Maintenance and support fees under a related software service agreement are
expected to approximate $31,000 annually.
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
8
against the claims. No provision for loss regarding these claims has been
recorded in the accompanying financial statements.
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 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.
6. RELATED PARTIES
Commissions of $25,207 and $72,034 were paid to business associates of the
Company who are immediate family members of the Company's president during the
quarter ended December 31, 2000 and the six months ended December 31, 2000,
respectively. Commissions of $4,103 and $9,881 were paid to Capital
Distribution, LLC, an entity controlled by Beverly Sassoon and Elan Sassoon
during the quarter ended December 31, 2000 and the six months ended December 31,
2000, respectively.
Legal expense includes $27,626 and $10,878 for the quarters ended December 31,
2000 and 1999, respectively, and $45,537 and $46,538 for the six months ended
December 31, 2000 and 1999, respectively, from a law firm whose principals and
affiliates are stockholders of the Company.
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 ended December 31, 2000. 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 the 80,000 shares of common
stock sold for $240,000 in the quarter ended December 31, 2000, the Company
incurred fees and expenses to the placement agent of $31,200, which have been
charged against additional paid-in capital.
In November 2000, Ms. Beverly Sassoon, Mr. Elan Sassoon, and Capitol
Distribution, LLC 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 (see Note 5). The call options are for 550,000 shares
of the Company's common stock at $1.50 per share. The call options vest over a
three-year period and are exercisable for five years subject the option and call
option agreements and the employment contracts with the Company. The Company has
granted registration rights for the call options in certain public offering 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 stockholder loaned the Company $50,000. Subsequent to
December 31, 2000, this stockholder loaned the Company $200,000.
9
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.
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
10
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 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. The valuation of the warrants resulted in an expense of
$895,000. 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.
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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 December 31, 2000 and
for the three-month periods ended December 31, 2000 and 1999 and the six months
ended December 31, 2000 and 1999:
Company sales commenced December 1999 and net sales for the quarters ended
December 31, 2000 and 1999 were $395,790 and $456,244, respectively, and
$1,094,812 and $456,244 for the six months ended December 31, 2000 and 1999,
respectively. The Company experienced declining monthly sales in the periods
ended December 31, 2000. In the period January 1 through February 15, 2001,
sales continued to decline to minimal amounts. The decline in sales is
attributed to the Company's 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.
Gross profit as a percentage of net sales was 29% of net sales for the quarter
ended December 31, 2000, compared to 76% for the quarter ended December 31,
1999, and 51% for the six months ended December 31, 2000, compared to 76% for
the six months ended December 31, 1999. The decrease in gross profit resulted
primarily from the Company beginning operations in December 1999 and a charge of
$141,002 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 40% for the quarter ended December 31, 2000 and the six months
ended December 31, 2000, compared to 27% for the periods ended December 31,
1999. 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 39% of group volume for the six months ended
December 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 first month of
operations.
Royalty and other related expense for the quarter ended December 31, 2000 was
$66,480 and $75,000 for the period quarter December 31, 1999 and $141,480 and
$100,000 for the six months ended December 31, 2000 and 1999, 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.
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Stock option and warrant expenses were $907,126 for the quarter ended December
31, 2000, compared zero for the quarter ended December 31,1999. The increase in
this expense resulted primarily from the issuance of warrants for investment
banking and financial advisory services.
Selling, general and administrative expenses were $433,860 and 109% of net sales
for the quarter ended December 31, 2000, compared to $340,690 for the period
ended December 31, 1999, and $826,498 and $454,503 for the six months ended
December 31, 2000 and 1999, respectively. The increase in selling, general and
administrative expenses resulted primarily from the Company beginning operations
in December 1999.
Net loss increased by approximately $1,232,686 for the quarter ended December
31, 2000 compared to a net loss of $193,238 in the quarter ended December 31,
1999 principally as a result of declining sales, decreased gross margins,
warrants issued for investment banking services and increased operating
expenses. Net loss as a percentage of net sales was 360% for the quarter ended
December 31, 2000.
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 $240,000,
cash collected on sales that commenced in December 1999 to fund operating
activities, and loans from a stockholder ($50,000 in December 2000 and $200,000
in February 2001). The Company needs additional funding during the remainder of
the fiscal year to pay liabilities, 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 modifying 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 funding in the
remainder of fiscal year June 30, 2001. The Company expects to have minimal cash
flow from sales in the months of February and March 2001 and possibly for the
quarter ending June 30, 2001.
The Company is currently generating negative cash from operations. 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 six months
ended December 31, 2000, the Company had negative cash flow from operations of
$553,829 This negative cash flow from operations primarily related to the
Company's net loss, increase in accounts receivable, increase in deposits for
inventory purchases, reduction of certain liabilities and a reduction in sales.
As of December 31, 2000, working capital deficit was $284,847. Cash at December
31, 2000 was $73,662.
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
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.
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The Company had capital expenditures of $124,275 for the period ended December
31, 2000. The Company anticipates capital expenditures of $100,000 during the
remainder of the fiscal year. At December 31, 2000, the Company has deposits of
$94,963 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 December 31,
2000 were $286,147, including $35,188 for the remainder of fiscal year 2001.
Additionally, the Company has entered into a non-cancelable operating lease for
warehouse and office space for the twenty-five months ending January 31, 2003 at
a monthly rental of $9,734. The company is seeking opportunities to sublease
certain of its leased space.
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.
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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
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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.
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
Item 6 Exhibits and Reports on Form 8-K
(A) Exhibits
None
(B) Reports on Form 8-K:
None
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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. Laza /s/Sonny Spoden
-------------------------- --------------------------
Sam A. Lazar Sonny Spoden
President and Chief Operating Chief Financial Officer
Officer
Dated: October 30, 2001
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