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 December 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 February 13, 2002,
6,933,313 shares of Common Stock are issued and outstanding.
INTERNATIONAL COSMETICS MARKETING CO.
Form 10-QSB for the quarter ended December 31, 2001
TABLE OF CONTENTS AND INFORMATION REQUIRED IN REPORT
- ----------------------------------------------------
Part I
Condensed Balance Sheet (Unaudited) as of December 31, 2001 3
Condensed Statements of Operations (Unaudited) for the three and six months
Ended December 31, 2001 and 2000 4
Condensed Statement of Changes in Stockholder's Equity
(Unaudited) for the three months December 31, 2001 5
Condensed Statements of Cash Flows (Unaudited) for the six months ended
December 31, 2001 and 2000 6
Notes to Condensed Financial Statements 8
Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Part II
Legal Proceedings 19
Changes in Securities and Use of Proceeds 19
Defaults upon Senior Securities 19
Submissions of Matters to a Vote of Security Holders 19
Other Information 19
Exhibits and Reports on Form 8-K 19
Signatures 20
2
Part I. Financial Information
Item 1. Condensed Financial Statements
International Cosmetics Marketing Co.
Condensed Balance Sheet
(Unaudited)
December 31,
2001
-----------
ASSETS
Current Assets:
Cash $ 485,604
Accounts receivable, net 64,072
Inventory, net 498,953
Prepaid expenses and other current assets 32,483
-----------
Total current assets 1,081,112
Office furniture and equipment, net 59,414
License agreement, net 190,052
Deposits 17,915
-----------
Total assets $ 1,348,493
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand notes payable to stockholder $ 500,000
Accounts payable 333,539
Payables to related parties 28,875
Accrued liabilities 89,343
-----------
Total current liabilities 951,757
Commitments and contingencies
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; 6,933,313 shares issued
and outstanding 6,933
Additional paid-in capital 6,879,915
Accumulated deficit (6,490,333)
-----------
Total stockholders' equity 396,736
-----------
Total liabilities and stockholders' deficiency $ 1,348,493
===========
The accompanying notes are an integral part of these condensed
financial statement.
3
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,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 698,763 $ 1,094,812 $ 50,013 $ 395,790
Cost of sales 289,993 535,873 31,243 279,324
----------- ----------- ----------- -----------
Gross profit 408,770 558,939 18,770 116,466
Operating expenses:
Commissions 33,723 441,173 1,840 159,674
Royalty and other expense - licensors 140,000 141,480 68,250 66,480
Selling, general and administrative:
Stock options and warrants for services 6,459 919,252 -- 907,126
Other 766,258 825,209 354,554 432,580
----------- ----------- ----------- -----------
Total operating expenses 946,440 2,327,114 424,644 1,565,860
----------- ----------- ----------- -----------
Operating loss (537,670) (1,768,175) (405,874) (1,449,394)
----------- ----------- ----------- -----------
Other income (expense):
Forgiveness of debt 6,690 51,225 -- 24,750
Interest income 8,327 -- 6,622 --
Interest expense (22,340) (1,280) (10,084) (1,280)
----------- ----------- ----------- -----------
(7,323) 49,945 (3,462) 23,470
Loss before income taxes (544,993) (1,718,230) (409,336) (1,425,924)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss (544,993) (1,718,230) (409,336) (1,425,924)
Discount attributaable to the beneficial
conversion feature of preferred stock -- (138,190) -- --
----------- ----------- ----------- -----------
Net loss applicable to comon stock $ (544,993) $(1,856,420) $ (409,336) $(1,425,924)
Net loss per share:
Basic $ (0.09) $ (0.39) $ (0.06) $ (0.30)
Diluted $ -- $ -- $ -- $ --
Weighted average common
shares outstanding:
Basic 6,306,912 4,773,665 6,809,780 4,796,690
Diluted 6,306,912 4,773,665 6,809,780 4,796,690
The accompanying notes are an integral part of these condensed
financial statement.
4
International Cosmetics Marketing Co.
Condensed Statement of Changes in Stockholders' Equity
For The Three Months Ended December 31, 2001
(Unaudited)
Preferred Common Additional Total
Stock Preferred Stock Common Paid-in Accumulated Stockholders'
Shares Stock Shares Stock Capital (Deficit) Equity
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 2001 221,458 $ 221 6,598,313 $ 6,598 $ 6,746,849 $(6,080,997) $ 672,671
Exercise of options -- -- 250,000 250 -- -- 250
Conversion of debenture -- -- 70,000 70 104,930 -- 105,000
Issuance of common stock for
legal services -- -- 15,000 15 28,136 -- 28,151
Net loss -- -- -- -- -- (409,336) (409,336
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2001 221,458 $ 221 6,933,313 $ 6,933 $ 6,879,915 $(6,490,333) $ 396,736
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed
financial statement.
5
International Cosmetics Marketing Co.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Six Months
Ended Ended
31-Dec 31-Dec
2001 2000
----------- -----------
Cash Flows From Operating Activities:
Net loss $ (544,993) $(1,718,230)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation expense 15,000 15,892
License amortization expense 6,953 6,954
Provision for uncollectible acccounts 19,671 --
Provision for inventory obsolescence -- 141,002
Consulting and legal expense -- 2,083
Stock options and warrants for services 6,459 919,252
Changes in operating assets and liabilities:
Accounts receivable (69,743) (29,906)
Inventory (276,363) 263,014
Deposits for inventory purchases 80,135 (94,983)
Prepaid expenses and other current assets (3,161) 44,718
Accounts payable (152,297) (30,801)
Payable to related parties (193,743) (13,694)
Accrued liabilities 62,345 (59,130)
----------- -----------
Net cash used in operating activities (1,049,737) (553,829)
Cash Flows From Investing Activities:
Purchase of computer equipment (4,621) (124,274)
Deposit for services 40,000 (9,734)
----------- -----------
Net cash used in investing activities 35,379 (134,008)
Cash Flows from Financing Activities:
Proceeds from issuance of notes payable to stockholder -- 50,000
Proceeds from issuance of common stock, net of issuance costs 1,410,376 206,760
Proceeds from issuance of preferred stock -- 500,000
----------- -----------
Net cash provided by financing activities 1,410,376 756,760
Net increase in cash 396,018 68,923
Cash, beginning of period 89,586 4,739
----------- -----------
Cash, end of period $ 485,604 $ 73,662
=========== ===========
The accompanying notes are an integral part of these condensed
financial statement.
6
International Cosmetics Marketing Co.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Six Months
Ended Ended
December 31, December 31,
2001 2000
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $30,340 $ --
Income taxes paid $ -- $ --
Supplemental Disclosure of Noncash Investing and Financing
Activities for the six months ended December 31, 2001:
Options of certain licensors valued at $6,459
15,000 shares of common stock issued for legal services valued at $28,151
70,000 shares of common stock issued for conversion of debenture at $1.50 per share
Supplemental Disclosure of Noncash Investing and Financing
Activities for the six months ended December 31, 2000:
Options of certain licensors valued at $24,252
Warrant expense for investment banking services valued at $895,000
The accompanying notes are an integral part of these condensed
financial statement.
7
International Cosmetics Marketing Co.
Notes to Condensed Financial Statements (Unaudited)
For the three and six months ended December 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, 2001 of International Cosmetics Marketing Co,
(the "Company"), d/b/a Beverly Sassoon & Co., 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 and six months ended December 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
The Company has the exclusive worldwide rights to use the names and likenesses
of Beverly Sassoon and Elan Sassoon.
The Company commenced operations in late 1999 to develop and distribute a
variety of skin care and nutritional products branded with the Beverly Sassoon
and Elan Sassoon names. Following the initial test phase from December 1999
through February 2001 using a network marketing method of distribution, the
Company developed skin care and sun care products for retail distribution. The
Company currently believes that its products require a more direct-to-consumer
marketing approach and is modifying its marketing strategy accordingly.
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 uncollectible accounts receivable, excess and obsolete inventory and sales
returns and allowances.
Revenue Recognition - The Company recognizes revenue at the time the product is
shipped to the Company's customers.
Sales returns and allowances - Accruals for sales returns and allowances are
based on industry experience and the Company's limited experience to date.
8
Inventories - Inventories are recorded at the lower of standard cost or market.
Standard costs approximate actual cost as 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.
Advertising Expense -- Advertising expense is recognized as incurred. The
Company had $8,500 of advertising expense in the three and six months ended
December 31, 2001 and no such expense in the three and six months ended December
31, 2000.
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.
Options and warrants issued to non employees have been valued under SFAS 123
using the Black-Shoals option pricing model.
Reclassifications -- Certain reclassifications have been made to the condensed
financial statements for the three and six months ended December 31, 2000 to
conform with the presentation of the three and six months ended December 31,
2001.
Accounting Pronouncements -- The Financial Accounting Standards Board ("FASB")
has recently issued Statements of Financing Accounting Standards No. 141
"Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for under the purchase method and
establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain, rather than deferred and
amortized. SFAS 142 changes the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS 142 are:
1) goodwill and intangible assets with indefinite lives will no longer be
amortized; 2) goodwill and intangible assets with indefinite lives must be
tested for impairment at least annually; and 3) the amortization period for
intangible assets with finite lives will no longer be limited to forty years.
SFAS are effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 141 and 142 are not expected to have a material effect on the
Company's financial position or results of operations.
In June 2001, the FASB also approved for issuance SFAS 143 "Asset Retirement
Obligations." SFAS establishes accounting requirements for obligations
associated with tangible long-lived assets. The adoption of SFAS 143 is not
expected to have a material effect on the Company's financial position, results
of operations, or cash flows.
9
4. CONCENTRATIONS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, accounts receivable and inventory.
The Company maintains its cash in demand deposit and money market accounts that,
at times, may exceed the Federal Deposit Insurance Corporation limits. These
balances are maintained with a high quality institution and the Company has not
experienced any losses in such accounts.
The Company currently has a concentration of its suppliers for inventory
containers, packing and shipping material, and product fulfillment.
In the three months and six months ended December 31, 2001, $7,932 and $633,058
of the Company's sales of $50,013 and $698,763, respectively, were with Target
Corporation. While initial orders from Target Corporation were encouraging, the
Company disagrees with Target Corporation retail pricing strategy and terminated
its relationship with Target Corporation in the three months ended December 31,
2001. The gross profit of the sales to Target Corporation represented 15% and
91% of the Company's gross profit for the three and six months ended December
31, 2001, respectively.
5. INVENTORIES
Inventories consist of the following:
Finished goods, net $227,148
Raw material, net 271,805
---------
$498,953
---------
6. ISSUANCE OF COMMON STOCK
In the three months ended September 30, 2001, the Company issued 109,350 shares
of common stock for $164,025 ($1.50 per share). In connection with the sale of
common stock the Company incurred placement agent fees and expenses of $25,560
and the placement agent has earned five year warrants, exercisable at $1.50 per
share, to purchase 10,935 shares of the Company's common stock with registration
rights with respect to the common stock underlying the warrants. The Company has
granted certain registration rights to the holders of these shares of common
stock.
In September 2001, the Company entered into a Stock Purchase Agreement with a
venture capital firm for the sale of 1,000,000 shares of the Company's common
stock for $1,500,000 ($1.50 per share) and warrants to purchase 750,000 shares
of the Company's common stock. The warrants are exercisable for five years at an
exercise price of $2.125 per share. Net proceeds to the Company after placement
agent fees and expenses of $195,000 (see Note 12) and legal expenses were
$1,271,661. The placement agent also earned five year warrants, exercisable at
$1.50 per share, to purchase 100,000 shares of the Company's common stock and
exercisable at $2.125 to purchase 75,000 shares of the Company's common stock
with registration rights with respect to the common stock underlying the
warrants (see Note 12). The placement agent fees and expenses and warrants were
allocated equally between the placement agent and a selling group member. The
Company has filed a Registration Statement and shall use its best efforts to
have the Registration Statement declared effective by the SEC as soon as
practicable. Additionally, the Registration Rights Agreements provides for one
demand registration right and certain piggyback registration rights. In
connection with this transaction, the Company's controlling preferred
stockholder (see Note13) has agreed to vote his and each transferee of his
shares of Common Stock or Preferred Stock to elect a director nominated by the
Board on behalf of the venture capital firm. This agreement shall terminate upon
the earlier of September 7, 2003 or any event which results in the venture
capital firm at any time being the beneficial owner of less than fifty percent
of the securities acquired from the Company.
10
Contemporaneously with the closing of the Stock Purchase Agreement, the venture
capital firm purchased 250,000 options of the Company from a non-affiliate
option holder. The Company did not receive any proceeds from the sale of these
options by the selling option holder. On October 22, 2001, these options for
250,000 shares of the Company's common stock were exercised at a price of $.001
per share. These options had been purchased from a former member of Beverly
Sassoon International, LLC
7. 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), Beverly Sassoon and
Elan Sassoon. The agreement was modified in October 2000 and amended in March
2001. The agreement grants the Company the rights to utilize Ms. Sassoon's and
Mr. Sassoon's names and likenesses with the manufacturing, distribution and
promotion of products, except for hair care products (as defined). 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 $20,004 and
$18,311 for the three months ended December 31, 2001 and 2000, respectively, and
$39,420 and $36,726 for the six months ended December 31, 2001 and 2000,
respectively.
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. On February 7, 2002, this lawsuit was settled with full, complete,
mutual and general release of all claims at no cost to the Company subject to
two conditions precedent between the plaintiff and defendants other than the
Company.
In the latter part of October 2001, Target Corporation requested allowances for
certain retail price reductions on product purchased from the Company and to
return certain product for refund. The Company does not believe that it is
obligated for these costs. No provision for sales returns and allowances has
been recorded in the accompanying financial statements.
11
8. RELATED PARTIES
In the three months ended September 30, 2001, the Company's controlling
preferred stockholder loaned the Company $230,000 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. In the three months ended December 31,
2001, the Company paid $230,000 of these notes leaving $500,000 payable. The
Company incurred interest expense of $8,228 and $18,287 and paid accrued
interest of $5,728 and $26,287 on these notes in the three and six months ended
December 31, 2001, respectively. At December 31, 2001, interest of $2,500 is
payable and is included in payables to related parties.
Royalty and other expenses of $68,250 and $66,480 were incurred for the three
months ended December 31, 2001 and 2000, respectively, and $140,000 and
$141,480 for the six months ended December 31, 2001 and 2000, respectively to
Beverly Sassoon International, LLC, a stockholder of the Company and an entity
controlled by Beverly Sassoon and Elan Sassoon. At December 31, 2001, $11,375 of
royalties are payable and included in payables to related parties.
Legal fees of $13,392 and $27,626 were incurred for the three months ended
December 31, 2001 and 2000, respectively, and $46,752 and $45,537 for the six
months ended December 31, 2001 and 2000, respectively, from a law firm whose
principals and affiliates are stockholders of the Company. During the three and
six months ending December 31, 2001, the Company paid this law firm $45,000 plus
15,000 shares of the Company's common stock and $95,494, respectively, leaving
zero payable to the law firm as of December 31, 2001. Legal fees of $13,645 of
this law firm from prior to July 1, 2000 were converted into preferred stock in
the six months ended December 31, 2000.
Public relations expense and related expenses of $17,002 and $33,975 were
incurred with a public relations firm that is a stockholder of the Company in
the three and six months ended December 31, 2001, respectively.
The Company has an Indemnification Agreement, as amended, with Beverly Sassoon,
Elan Sassoon, and Capital Distributors, LLC, an entity controlled by Beverly
Sassoon and Elan Sassoon, whereby certain stock options to purchase 200,000
shares of the Company's common stock held by these parties can be cancelled by
the Company under certain circumstances.
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 12. Under this agreement, consulting expense of $15,000 and
$30,000 were incurred in the three months ended December 31, 2001 and 2000,
respectively and $45,000 and $30,000 for the six months ended December 31, 2001
and 2000, respectively. During the three months ended December 31, 2001, the
Company paid $120,000 of this consulting expense and $3,387 of expenses leaving
$15,000 payable as of December 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
$1,109,360 in the three months ended September 30, 2001, the Company incurred
fees and expenses to the placement agent of $216,323 which have been charged
against additional paid-in capital (see Note 6).
During the six months ended December 31, 2001, the Company paid $15,417 to a
stockholder to retire an advance payable. During the six months ended December
31, 2000, an advance payable to a stockholder for $45,000 was converted into the
Company's common stock at $2.50 per share. During the six months ended December
31, 2000, an advance payable to an affiliate of a stockholder of $40,000 was
converted into convertible preferred stock.
During the six months ended December 31, 2000, liabilities aggregating $54,749
under a verbal consulting agreement with a stockholder and a related distributor
were converted to 39,900 shares of the Company's common stock at $2.50 per
share.
12
During the six months ended December 31, 2000, two consulting agreements with
companies affiliated with a stockholder were terminated. The 400,000 shares of
the Company's common stock conditionally issued to these entities in the year
ending June 30, 2000 were returned to the Company at no cost to the Company and
cancelled.
Commissions of $25,207 and $72,034 were paid to distributors of the Company who
were immediate family members of the Company's former president during the three
and six months ended December 31, 2000, respectively. Commissions of $4,103 and
$9,881 were paid to Capital Distributors, LLC, an entity controlled by Beverly
Sassoon and Elan Sassoon during the three and six months ended December 31,
2000.
9. 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.
10. CONVERTIBLE DEBENTURES - STOCKHOLDER
During the year ended June 30, 2000, the Company issued 0% convertible
debentures to an individual aggregating $2,000,000. In June 2000, the debenture
holder converted $1,895,000 of the debentures to 379,000 shares of the Company's
common stock at $5.00 per share. In December 2001, the outstanding debenture of
$105,000 was converted into 70,000 shares of the Company's common stock at $1.50
per share.
11. 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 $1.50 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 is redeemable
solely at the option of the Company.
The Company recognized the discount attributable to the beneficial conversion
feature of $138,190 by accreting the amount from the issued date through the
last date that the shareholders could convert (September 27, 2000) as an
adjustment to net loss attributable to common stockholders. Additionally, the
Company recognized additional discount attributable to the beneficial conversion
feature of $16,831 by accreting the amount from the date (April 20, 2001) when
the Company adjusted the conversion ration to $1.50 per share. The adjustment
resulted in a charge to net loss applicable to common stock and an accompanying
increase to additional paid-in capital. The financial amounts of the prior
periods were restated in the three months ended December 31, 2001 to reflect
these adjustments.
13
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.
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. The preferred stock is not
redeemable at the options of the holders.
12. FINANCIAL ADVISORY AND INVESTMENT BANKING SERVICES CONSULTING CONTRACT
On October 13, 2000, the Company entered into a consulting agreement for
financial advisory and investment banking services with an NASD broker dealer.
Certain principals of the broker dealer are stockholders of the Company,
including the primary convertible preferred shareholder (see Note 11). The
agreement provides a monthly consulting fee of $10,000 (amended to $5,000 per
month effective October 2001) plus five-year "cashless exercise" warrants to
purchase 250,000 shares of the Company's common stock at an exercise price of
$1.50 (as adjusted) (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
14
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. 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.
13. GOING CONCERN
As reflected in the accompanying condensed financial statements, in the three
months ended December 31, 2001, the Company terminated its relationship with
Target Corporation, the largest of the Company's two customers, and incurred a
net loss of $409,336 and $544,993 for the three and six months ended December
31, 2001, respectively. Target Corporation accounted for 15% and 91% of gross
profit for the three and six months ended December 31, 2001, respectively, total
net sales were only $50,013 for the three months ended December 31, 2001 and net
cash used in operations were $1,049,737 for the six months ended December 31,
2001. The Company's independent auditors have concluded that due to recurring
net losses, negative cash flows from operations and termination of the
relationship with Target Corporation, these matters raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plan with regard to this matter encompasses redirecting its
marketing strategy to a direct-to-consumer approach, expanding sales to its
remaining sole customer, and minimizing operating expenses. Unless sales are
made in the six months ending June 30, 2002, the Company will be required to
attempt to raise additional funding for operations. The expected capital needs
assume that the Company's demand note holder, who is the Company's controlling
shareholder, will not demand payment of the $500,000 demand notes payable or any
significant part thereof.
The eventual outcome of the success of management's plans cannot be ascertained
with any degree of certainty. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
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 the exclusive worldwide rights to use the names and
likenesses of Beverly Sassoon and Elan Sassoon for the marketing of products,
except for hair care products (as defined).
The Company commenced operations in late 1999 to develop and distribute a
variety of skin care and nutritional products branded with the Beverly Sassoon
and Elan Sassoon names. Following the initial test phase from December 1999
through February 2001 using a network marketing method of distribution, the
Company developed skin care and sun care products for retail distribution. The
Company currently believes that its products require a more direct-to-consumer
marketing approach and is modifying its marketing strategy accordingly.
15
RESULTS OF OPERATION
Comparison of the Company's financial information as of December 31, 2001 and
for the three and six months ended December 31, 2001 and 2000:
Company sales commenced December 1999 and net sales for the three months ended
December 31, 2001 and 2000 were $50,013 and $395,790, respectively and $698,763
and $1,094,812 for the six months ended December 31, 2001 and 2000,
respectively. Sales for the three and six months ended September 30, 2000 were
from direct sales utilizing a network marketing distribution model that was
terminated in March 2001. New skin care and sun care products were developed for
the retail market and the first such sales were made in July 2001 to Target
Corporation and subsequently to Ulta Salon, Cosmetics & Fragrance, Inc. - a
ninety-store specialty cosmetics chain operating in fourteen states. While
initial orders from Target Corporation were encouraging, the Company disagrees
with Target Corporation's retail pricing strategy and terminated its
relationship with Target Corporation in the three months ended December 31,
2001. Sales to Target Corporation for the three and six months ended December
31, 2001 were $7,932 and $633,058, respectively, and represented 15% and 91% of
the Company's net sales, respectively.
In consideration of its experience with Target Corporation, the Company believes
that is products require a more direct-to-consumer marketing approach and is
implementing such an approach. The Company expects to begin replacing the sales
to Target Corporation in the quarter ending June 30, 2002.
Gross profit as a percentage of net sales was 38% and 29% for the three months
ended December 31, 2001 and 2000, respectively, and 58% and 51% for the six
months ended December 31 2001 and 2000, respectively. The increase in gross
profit percentage resulted primarily from the Company introducing new products
to a new customer base. The gross profit on sales to Target Corporation, which
will not be recurring in the future, were 15% and 91% of the Company's gross
profit for the three and six months ended December 31, 2001.
Commission expense, as a percentage of net sales was 3.7% and 40% for the three
months ended December 31, 2001 and 2000, respectively, and 4.8% and 40% for the
six months ended December 31, 2001 and 2000, respectively. The decrease in
commissions as a percentage of net sales resulted changing from a network
marketing distribution model to selling to the retail market.
Royalty and other related expense was $68,250 and $66,480 for the three months
ended December 31, 2001 and 2000, respectively, and $140,000 and $141,480 for
the six months ended December 31, 2001 and 2000, respectively. The changes in
royalty expense resulted from the royalty agreement being changed in October
2000 and March 2001.
Selling, general and administrative expenses were $354,554 and 709% of net sales
for the three months ended December 31, 2001, compared to $1,340,986 and 339% of
net sales for the three months ended December 31, 2000. Selling, general and
administrative expenses were $772,717 and 111% of net sales for the six months
ended December 31, 2001, compared to $1,745,741 and 160% of net sales for the
six months ended December 31, 2000. The decrease in selling, general and
administrative expenses is primarily attributable to stock options and warrants
issued in the three months ended December 31, 2000 for services (principally
investment banking services) and efforts to minimize operating expenses in
fiscal 2002.
Net loss decreased by approximately $1,016,588 for the three months ended
December 31, 2001 compared to a net loss of $1,425,924 for the three months
ended December 31, 2000 principally as a result of reductions in commissions
resulting from termination of the Company's network marketing operations in
March 2001 and stock operations and warrants issued for services (principally
investment banking services) in October 2000 offset by reduced sales due to the
Company's termination of its relationship with Target Corporation in the three
months ended December 31, 2001. Net loss decreased by approximately $1,311,427
for the six months ended December 31, 2001 compared to a net loss of $1,718,230
16
for the six months ended December 31, 2000 principally as a result of reductions
in commissions resulting from termination of the Company's network marketing
operations in March 2001 and stock operations and warrants issued for services
(principally investment banking services) in October 2000 offset by reduced
sales due to the Company's termination of its relationship with Target
Corporation in the three months ended December 31, 2001. Net loss as a
percentage of net sales was 818% and 78% for the three and six months ended
December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for funds have been for working capital
(principally accounts receivable and 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, preferred stock, common stock, and
notes payable (primarily secured) of approximately $3,835,000 in the period
August 1999 through June 30, 2001, and cash collected on product sales of
approximately $3,830,000 in the period December 1999 through December 31, 2001.
In the three months ended September 30, 2001, the Company issued 109,350 shares
of common stock for $164,025 ($1.50 per share). In connection with the sale of
common stock the Company incurred placement agent fees and expenses of $25,560
and the placement agent has earned five year warrants, exercisable at $1.50 per
share, to purchase 10,935 shares of the Company's common stock with registration
rights with respect to the common stock underlying the warrants. The Company has
granted certain registration rights to the holders of these shares of common
stock.
In September 2001, the Company entered into a Stock Purchase Agreement with a
venture capital firm for the sale of 1,000,000 shares of the Company's common
stock for $1,500,000 ($1.50 per share) and warrants to purchase 750,000 shares
of the Company's common stock. The warrants are exercisable for five years at an
exercise price of $2.125 per share. Net proceeds to the Company after placement
agent fees and expenses of $195,000 and legal expenses were $1,271,661. The
placement agent also earned five year warrants, exercisable at $1.50 per share,
to purchase 100,000 shares of the Company's common stock and exercisable at
$2.125 to purchase 75,000 shares of the Company's common stock with registration
rights with respect to the common stock underlying the warrants. The placement
agent fees and expenses and warrants were allocated equally between the
placement agent and a selling group member. The Company has agreed to file a
Registration Statement as promptly as practicable (but in any event within 90
days) and to use its best efforts to have the Registration Statement declared
effective by the SEC as soon as practicable thereafter. Additionally, the
Registration Rights Agreements provides for one demand registration right and
certain piggyback registration rights. In connection with this transaction, the
Company's major preferred stockholder has agreed to vote his and each transferee
of his shares of Common Stock or Preferred Stock to elect a director nominated
by the Board on behalf of the venture capital firm. This agreement shall
terminate upon the earlier of September 7, 2003 or any event which results in
the venture capital firm at any time being the beneficial owner of less than
fifty percent of the securities acquired from the Company.
The Company is currently generating negative cash from operations. For the six
months ended December 31, 2001, the Company had negative cash flow from
operations of $1,049,737. This negative cash flow from operations is primarily
related to the Company's net loss, increases in accounts receivable and
inventory and decreases in accounts payable and payables to related parties.
Since the Company has terminated its relationship with Target Corporation in the
three months ended December 31, 2001 as a result of Target Corporation's retail
pricing strategy, the Company's previously expected revenues and cash inflows
are adversely affected and the Company is dependent upon expanding sales to its
17
sole customer and obtaining new customers. This situation with Target
Corporation may hinder the Company in attracting business from certain potential
new customers. The Company believes that its products require a more
direct-to-consumer marketing approach and is modifying its marketing strategy
accordingly. The Company does not expect to begin obtaining additional sales to
replace the sales to Target Corporation until the three months ending June 30,
2002. The Company may also be required to spend additional amounts on marketing,
packaging design and advertising to attract new customers.
As of December 31, 2001, working capital was $129,355. Cash at December 31, 2001
was $485,604.
As reflected in the accompanying condensed financial statements, in the three
months ended December 31, 2001, the Company terminated its relationship with
Target Corporation, the largest of its two customers, and incurred a net loss of
$409,336 and $544,993 for the three and six months ended December 31, 2001,
respectively. Target Corporation accounted for 15% and 91% of gross profit for
the three and six months ended December 31, 2001, respectively, total net sales
were only $50,013 for the three months ended December 31, 2001 and net cash used
in operations was $1,049,737 for the six months ended December 31, 2001. The
Company's independent auditors have concluded that due to recurring net losses,
negative cash flows from operations and termination of the relationship with
Target Corporation, these matters raise substantial doubt about the Company's
ability to continue as a going concern.
The Company plans to redirect its marketing strategy to a direct-to-consumer
approach, expanding sales to its remaining sole customer, and minimizing
operating expenses. Expected capital needs for the remainder of fiscal 2002 are
expected to be minimal if the Company sells its inventory that has been paid for
in full by the Company. If sales by the Company remain sluggish with operating
expenses being kept at their current minimal level, expected capital needs for
the remainder of fiscal 2002 are also expected to be minimal; however,
additional capital would be needed in the first quarter of fiscal 2003. Although
not currently planned for, additional capital would be needed for advertising
and building the Beverly Sassoon and Elan Sassoon brand names. The expected
capital needs assume that the Company's demand note holder, who is the Company's
controlling shareholder, will not demand payment of the $500,000 demand notes
payable or any significant part thereof. There is no assurance that the Company
can increase profitable sales and raise additional funding if it is needed. The
failure of the Company to increase profitable sales and to raise additional
funding would have a material adverse effect on the Company's business,
financial condition, and results of operations and the Company may have to
curtail operations.
The Company had capital expenditures of $4,621 for the six months ended December
31, 2001. The Company anticipates minimal, if any, capital expenditures during
the remainder of the fiscal year.
The Company leases office space under a non-cancelable operating lease expiring
October 31, 2004. Minimum future operating lease obligations December 31, 2001
were $215,145, including $37,064 for the remainder of fiscal year 2002.
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.
18
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, 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. On February 7, 2002, this lawsuit was
settled with full, complete, mutual and general release of all claims at no cost
to the Company subject to two conditions precedent between the plaintiff and
defendants other than the Company.
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 required by Item 601 of Regulation S-B
None.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on October 5, 2001
regarding the Company entering into a Stock Purchase Agreement and
Registration Rights Agreement.*
* Previously filed.
19
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/ Nico P. Pronk /s/ Sonny Spoden
- ---------------------------- -------------------
Nico P. Pronk Sonny Spoden
President Chief Financial Officer
Dated: February 14, 2001
20