<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1999
OR
[_] 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 0-16819
FRAGRANCENET.COM, INC.
(exact name of registrant as specified in its charter)
<TABLE>
Delaware 5990 94-3054267
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2070 Deer Park Avenue
Deer Park, New York 11729
(516) 242-3205
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT DECEMBER 31, 1999
- ----- --------------------------------
Common Stock, par value 13,655,484
$.01 per share
<PAGE>
Index
FRAGRANCENET.COM, INC.
PAGE NUMBER
-----------
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets at December 31, 1999
and March 31, 1999................................................3
Consolidated Statements of Operations for the Three and Nine
Months Ended December 31, 1999 and December 31, 1998..............4-5
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1999 and December 31, 1998..............6
Notes to Consolidated Financial Statements........................7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...........................10-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk........12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................13
Signatures.................................................................14
<PAGE>
Item 1. Consolidated Financial Statements (Unaudited)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
December 31, March 31,
1999 1999
(Unaudited)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 729,754 $ 77,669
Accounts receivable 90,468 7,426
Inventory 59,424 6,500
Prepaid expenses and other current assets 21,126 396
----------- -----------
Total Current Assets 900,772 91,991
Property and Equipment - net of accumulated depreciation
and amortization of $21,715 and $11,541 31,341 28,965
Intangible Asset - net of accumulated amortization
of $500 and $125 7,000 7,375
----------- -----------
Total Assets $ 939,113 $ 128,331
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Loans Payable - Stockholders - 25,000
Accounts payable and accrued expenses $ 611,977 $ 99,047
----------- -----------
Total Liabilities 611,977 124,047
----------- -----------
Stockholders' Equity:
Convertible Series A Preferred stock - $.01 par value;
3,000,000 less shares authorized,
No shares issued and outstanding - -
Common stock - $.01 par value;
50,000,000 shares authorized, 16,868,330 and
1,673,190 shares outstanding 168,683 18,131
Additional paid-in capital 369,020 81,869
----------- -----------
537,703 100,000
Accumulated deficit (210,567) (95,716)
----------- -----------
Total Stockholders' Equity 327,136 4,284
----------- -----------
Total Liabilities and Stockholders' Equity $ 939,113 $ 128,331
=========== ===========
</TABLE>
3
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CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Three Months Ended December 31,
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 2,136,502 $ 405,606
Cost of Sales 1,312,839 268,084
----------- -----------
Gross Profit 823,663 137,522
----------- -----------
Operating Expenses:
Selling and marketing 543,829 56,979
General and administrative 271,939 77,802
----------- -----------
Total Operating Expenses 815,768 134,781
----------- -----------
Income From Operations 7,895 2,741
Interest Income 5,199 -
----------- -----------
Net Income $ 13,094 $ 2,741
=========== ===========
Basic and diluted loss per common share $ 0.00 $ 0.00
Weighted average number of common shares outstanding 11,720,760 1,673,190
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Nine Months Ended December 31,
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 3,273,246 $ 695,850
Cost of Sales 2,035,483 450,976
----------- -----------
Gross Profit 1,237,763 244,874
----------- -----------
Operating Expenses:
Selling and marketing 840,114 93,304
General and administrative 520,118 168,013
----------- -----------
Total Operating Expenses 1,360,232 261,317
----------- -----------
Loss From Operations (122,469) (16,443)
Interest Income 7,618 -
----------- -----------
Net Loss $ (114,851) $ (16,443)
=========== ===========
Basic and diluted loss per common share $ (0.02) $ (0.02)
Weighted average number of common shares outstanding 6,167,364 1,673,190
</TABLE>
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $(114,851) $ (16,443)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization 10,549 4,463
Changes in:
Accounts receivable (83,042) (11,803)
Inventory (52,924) -
Prepaid expenses and other current assets (20,730) 5,769
Accounts payable 512,930 119,993
--------- ---------
Net cash provided by continuing operations 251,932 101,979
Cash flows from investing activities:
Acquisition of property and equipment (12,550) (19,930)
--------- ---------
Net cash used in investing activities (12,550) (19,930)
Cash flows from financing activities:
Repayment of shareholder loan (25,000) (24,186)
Cash acquired pursuant to the merger, net 437,703 -
--------- ---------
Net cash provided by financing activities 412,703 (24,186)
--------- ---------
Net increase in cash and cash equivalents 652,085 57,863
Cash and cash equivalents, beginning of the period 77,669 106,980
--------- ---------
Cash and cash equivalents, end of the period $ 729,754 $ 164,843
========= =========
</TABLE>
6
<PAGE>
Notes to Unaudited Financial Statements
1. Basis of Presentation
The accompanying financial statements present the historical financial results
of TeleScents, Inc. and include the net assets acquired in National Capital
Management Corporation's (NCMC) acquisition of TeleScents, Inc. on July 28,
1999. The acquisition of TeleScents was accounted for as a reverse acquisition
as described in note 2. NCMC had no operations subsequent to July 28, 1999.
The financial information for the three- and nine-month periods ended December
31, 1999 and 1998 presented in this Form 10-QSB has been prepared from the
accounting records without audit. The information furnished reflects all
adjustments (consisting of only normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of the results for interim
periods. The results for the nine months ended December 31, 1999 are not
necessarily indicative of the results to be expected for a full year. The
balance sheet as of March 31, 1999 has been derived from audited financial
statements.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions of Form 10-Q of Regulation S-X. Accordingly, they do
not include all the information and notes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the Company's financial statements for the year ended
March 31, 1999 and notes thereto included in the Company's Form 8-K dated August
10, 1999.
2. TeleScents Reverse Acquisition of FragranceNet.com
On July 28, 1999, National Capital Management Corporation (the "Company")
entered into an Agreement and Plan of Merger (the "Merger Agreement") by and
among the Company, FAC, Inc., a wholly-owned subsidiary of the Company ("Merger
Sub"), TeleScents, Inc., a New York corporation ("TeleScents"), and Dennis M.
Apfel, Jason S. Apfel and Growth Capital Partners, L.L.C. ("Growth Capital"),
the holders of all of the outstanding capital stock of TeleScents (the
"Shareholders"). Pursuant to the terms of the Merger Agreement, Merger Sub
merged with and into TeleScents (the "Merger"), whereupon the separate corporate
existence of Merger Sub ceased and TeleScents continued as the surviving
corporation.
Pursuant to the Merger Agreement, the Company issued to the Shareholders an
aggregate of 4,900,000 shares of the Company's common stock (the "Common Stock")
and an aggregate of 1,029,514 shares of the Company's Series A Preferred Stock
(the "Preferred Stock"). The Preferred Stock is convertible into Common Stock on
a 1-for-10 basis at such time as the Certificate of Incorporation of the Company
is amended to increase the authorized shares of Common Stock to a number of
shares of Common Stock sufficient to effect the conversion. In accordance with
the Post-Closing Agreement (defined below), the Company anticipates that the
Preferred Stock will be converted into 10,295,140
7
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shares of Common Stock following a meeting of stockholders of the Company. The
Preferred Stock carries voting privileges on an "as converted" basis.
Accordingly, the Shareholders, in the aggregate, hold approximately 89.55% of
the total voting power of the Company's voting stock. The conversion of the
Preferred Stock to Common Stock occurred subsequent to a meeting of the
stockholders of the Company on November 16, 1999 (see note 4).
In connection with the Merger, the Company, TeleScents and the Shareholders
entered into an agreement regarding certain closing and post-closing matters
(the "Post-Closing Agreement") which provides, among other things, that the
Company will hold a meeting of its stockholders as soon as practicable to (i)
elect new directors, (ii) amend the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock, (iii) adopt a stock
option plan and (iv) ratify the Board of Directors' selection of the independent
auditor for the Company for the current fiscal year. Such meeting was held on
November 16, 1999. The Post-Closing Agreement also provides for the maintenance
of an account for payment, among other things, of expenses of the Company
incurred prior to the Merger. As of the effective date of the Merger, Jason S.
Apfel, the President of TeleScents, became the Chief Executive Officer and
President of the Company and the Surviving Corporation and Dennis M. Apfel, the
Chief Financial Officer of TeleScents, became the Chief Financial Officer and
Secretary of the Company and the Surviving Corporation.
In connection with the Merger, the Company has also changed its name to
FragranceNet.com, Inc. and has changed its ticker symbol to "FRGN".
The Company's acquisition of TeleScents was accounted for as a reverse
acquisition with TeleScents as the accounting acquirer, as the shareholders of
TeleScents gained voting control of the Company pursuant to the Merger. After
accounting for dividends to pre-transaction holders of common stock and payment
of contingent liabilities and merger costs, $437,703 of cash was the only asset
remaining in the Company. Accordingly, as the only asset of the Company at the
time of the transaction was cash, the reverse acquisition is accounted for as a
recapitalization of TeleScents with the issuance of shares of common stock to
the pre-transaction stockholders of FragranceNet.com in exchange for cash.
The following unaudited pro forma statement of operations data for the nine
months ended December 31, 1999, gives effect to the above transaction as if it
had occurred on April 1, 1999 and reflects the historical operations of the
purchased business (FragranceNet.com) adjusted for reduced interest income to
that amount earned on the cash balances retained by the merged entity and
reduced corporate expenses for those not associated with the merged entity.
Pro forma information
Net sales $3,273,246
Net loss (89,851)
Loss per share (0.01
8
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The unaudited pro forma results of operations are not necessarily indicative of
what the actual results of operations would have been had the transaction
occurred on the date indicated above, nor do they represent future financial
results of operations.
3. Long Term Incentive Plan
On November 16, 1999, the Company adopted the 1999 Long Term Incentive Plan
which provides for the granting of options for up to 1.5 million shares of
Common Stock to employees and directors.
4. Increase in authorized shares of Common Stock
On November 16, 1999, the shareholders approved an amendment to the Certificate
of Incorporation of the Company to increase the authorized shares of Common
Stock from 6,666,666 to 50,000,000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with the
financial statements and notes to the financial statements.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statement of operations.
There can be no assurance that trends in sales growth will continue in the
future.
Three Months Ended December 31, 1999 1998
- -------------------------------------------------------------------------
Net Sales $ 2,136,502 $ 405,606
Cost of Sales 1,312,839 268,084
Gross Profit 823,663 137,522
Total Operating Expenses 815,768 134,781
Income from Operations 7,895 2,741
Other Income - Interest Income 5,199 -
Net Loss 13,094 2,741
Overview
The Company sells brand name fragrances and related products over the Internet
through a website located at www.fragrancenet.com. The Company purchases
products from 5-8 different suppliers and does not purchase the products until
they are ordered and paid for by the consumer. Payment is made by credit card or
by check and goods are not shipped to the customer until the check clears and/or
authorization from the credit card company is obtained. The Company does not
carry any significant level of inventory and its accounts receivable are
primarily from credit card companies.
On July 28, 1999, the Company completed a merger in which the Company was the
surviving entity and received $437,703 in cash, net of expenses, as a result of
the transaction.
Revenues
Revenues for the quarter ended December 31, 1999 increased $1,730,896 or 527 %
over the comparable period in 1998 due to an increase in the number of
customers.
Cost of Sales
The cost of sales as a percentage of sales were 61% in the quarter ended
12/31/99 and 66% in the quarter ended 12/31/98. The cost of sales percentage
decreased due to a change in product mix.
10
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Selling, General and Administrative Expenses
These expenses encompass the entire operations of the business from personnel
required to operate the office to website development and hosting of the
website. The expenses increased $680,987 in the quarter ended 12/31/99 when
compared to 12/31/98. As a percentage of sales, the expenses increased from 33%
at 12/31/98 to 38% at 12/31/99. The expense increases are a result of the
general growth of the Company.
Operating Results
As a result of the Company's aggressive purchasing and addition of new suppliers
with enhanced pricing the Company experienced an operating profit of $7,895 for
the quarter ended 12/31/99.
Income Taxes
By reason of prior net operating losses, no income taxes were due for any period
presented.
The changes in the amounts for the nine months ended December 31, 1999, compared
with the nine months ended December 31, 1998, were for similar reasons as for
the quarters.
Liquidity, Capital Resources and Changes in Financial Condition
The Company's cash was sufficient to enable it to meet its cash requirements
during the quarter ended December 31, 1999. The main reasons for capital are to
acquire merchandise for sale over the Internet through the Company website, for
the maintenance of the website and for advertising and promotion to bring
consumers to the website.
At 12/31/99 the Company had working capital of $288,795 and cash and cash
equivalents of $729,754 as compared to working capital of $45,014 and cash and
cash equivalents of $164,843 at 12/31/98. The Company had a net profit from
operations of $7,895 for the quarter ended 12/31/99.
The merger effected by the Company on July 28, 1999 resulted in an increase in
the Company's cash of $437,703, net of related expenses.
Year 2000 Information
The Company has not experienced any Y2K problems to date.
Forward Looking Statements
Certain statements contained in "Management's Discussion and Analysis of Results
of Operations and Financial Condition" concerning future prospects of the
Company and cash flow requirements are forward looking statements, as defined in
the Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projections in the forward looking statements which
statements involve risks and uncertainties, including but not limited to the
following: risks relating to the competitive nature of the markets for sale of
fragrances over the internet.
11
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no risks which are required to be disclosed.
12
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders (the "Meeting") of the Company
was held on November 16, 1999 at 520 Madison Avenue, 40th Floor, New York, New
York.
(b) Not applicable because:
(i) Proxies for the meeting were solicited pursuant to
Regulation 14 under the Securities Act of 1934,
(ii) There was no solicitation in opposition to management's
nominees as listed in the Company's Proxy Statement dated October 19, 1999.
(iii) Such nominees were elected.
(c) Matters to be voted on at the meeting were as follows:
<TABLE>
<S> <C> <C> <C>
Votes For Votes Against Withheld/
--------- ------------- ---------
Abstain
-------
(i) Election of four members of
the Board of Directors of the
Company:
Jason S. Apfel 6,235,816 30,689
Dennis M. Apfel 6,234,567 31,938
Philip D. Gunn 6,235,818 30,687
James J. Pinto 6,235,573 30,932
(ii) Approval of an amendment to 6,227,001 22,704 16,800
the Certificate of
Incorporation of the Company
to increase the authorized
number of shares of Common
Stock, par value $.01 per
share, of the Company from
6,666,666 to 50,000,000.
(iii) Approval of the 5,721,261 33,976 22,601
FragranceNet.com, Inc. 1999
Long Term Incentive Plan.
(iv) Ratification of the Board of 6,237,517 9,566 19,422
Directors' selection of KPMG
LLP to serve as the Comany's
independent accountants for
the Company's fiscal year
ending March 31, 2000.
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On November 30, 1999, the Company filed a current report on Form 8-K
dated November 30, 1999, reporting under Item 5 of Form 8-K the filing with the
Secretary of State of the State of Delaware of an amendment of the Certificate
of Incorporation of the Company increasing the number of shares of common stock,
$.01 par value, that the Company is authorized to issue from 6,666,666 to
50,000,000.
On December 16, 1999, the Company filed a current report on Form 8-K
dated December 13, 1999, reporting under Item 4 of Form 8-K the Company's
selection of KPMG LLP as its independent auditors for the fiscal year ending
March 31, 2000.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 14, 2000 FRAGRANCENET.COM, INC.
-----------
(Registrant)
Dated: February 14, 2000 By /s/ JASON S. APFEL
------------------------------
Jason S. Apfel
President and
Chief Executive Officer
Dated: February 14, 2000 By /s/ DENNIS M. APFEL
------------------------------
Dennis M. Apfel, Esq.
Chief Financial Officer
14
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INDEX TO EXHIBITS
-----------------
Exhibit Page
Number Description Number
- --------------------------------------------------------------------
27 Financial Data Schedule 16
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-2000
<PERIOD-START> OCT-01-1999 APR-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 0 729,754
<SECURITIES> 0 0
<RECEIVABLES> 0 90,468
<ALLOWANCES> 0 0
<INVENTORY> 0 59,424
<CURRENT-ASSETS> 0 900,772
<PP&E> 0 53,056
<DEPRECIATION> 0 21,715
<TOTAL-ASSETS> 0 939,113
<CURRENT-LIABILITIES> 0 611,977
<BONDS> 0 0
0 0
0 0
<COMMON> 0 168,683
<OTHER-SE> 0 369,020
<TOTAL-LIABILITY-AND-EQUITY> 0 939,113
<SALES> 2,136,502 3,273,246
<TOTAL-REVENUES> 2,136,502 3,273,246
<CGS> 1,312,839 2,035,483
<TOTAL-COSTS> 1,312,839 2,035,483
<OTHER-EXPENSES> 815,768 1,360,232
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 13,094 (114,851)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 13,094 (114,851)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,094 (114,851)
<EPS-BASIC> 0.00 (0.02)
<EPS-DILUTED> 0.00 (0.02)
</TABLE>
