<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _______________to________________
Commission file number 0-11969
MEHL/BIOPHILE INTERNATIONAL CORPORATION
_____________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Delaware 22-2408186
_____________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) identification No.)
4127 Northwest 27th Lane, Gainesville, FL 32606
_____________________________________________________________________________
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number (352) 373-2565
______________________________
_____________________________________________________________________________
Former name, former address and former fiscal year, if changed
since last report
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of February 28, 1997
43,743,301 shares of common stock, $.01 par value
_____________________________________________________________________________
Page 1 of 19 pages
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
Index
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Condensed consolidated balance sheet as
of February 28, 1997 3
Condensed consolidated statements of
operations for the nine and three months
ended February 28, 1997 and February 29, 1996 4-5
Condensed consolidated statements of
cash flows for the nine months ended
February 28, 1997 and February 29, 1996 6-7
Notes to condensed consolidated financial
statements 8-11
Item 2. Management's discussion and analysis of
financial condition and results of operations 12-14
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibit 11 Statement Re: Computation of net income
per common share 18-19
* * * *
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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
FEBRUARY 28, 1997
ASSETS
CURRENT ASSETS:
Cash and equivalents $11,034,349
Accounts receivable, net of allowance for doubtful
accounts of $654,137 478,353
Inventories 3,856,300
Current portion of note receivable 50,000
Other current assets 570,141
Total current assets 15,989,143
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $1,085,622 1,608,136
PATENTS AND PATENT RIGHTS, net of accumulated amortization
of $1,466,226 4,620,626
LOANS AND ADVANCES 523,077
NOTES RECEIVABLE, net of current portion 50,000
OTHER ASSETS 974,371
$23,765,353
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,500,256
Accrued expenses 1,842,806
Total current liabilities 4,343,062
MINORITY INTEREST IN SLS BIOPHILE LTD 259,366
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value, $1,000 stated value,
authorized-200,000 shares:
Series C, 5% cumulative convertible;
Issued and outstanding-2,231 shares 2,231,000
Series D, 5% cumulative convertible;
Issued and outstanding-10,000 shares 10,000,000
Common stock, $.01 par value, 60,000,000 shares
authorized, 46,218,260 shares issued 462,183
Additional paid-in capital 21,113,400
Accumulated deficit (13,665,162)
Foreign currency translation adjustment (22,897)
20,118,524
Treasury stock, at cost, 2,474,959 common shares (955,599)
Total stockholders' equity 19,162,925
$23,765,353
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
OPERATING REVENUES $ 2,420,027 $ 1,596,312
COST OF SALES 1,601,035 950,698
GROSS MARGIN 818,992 645,614
OPERATING EXPENSES:
Selling, general and administrative 6,694,452 935,183
Research an development 1,484,013 0
Interest 23,829 0
8,202,294 935,183
(7,383,302) (289,569)
OTHER INCOME (LOSS):
Investment income (loss) (396,721) 87,767
Other 0 72,728
MINORITY INTEREST IN LOSS OF SUBSIDIARY 364,106 0
NET LOSS $(7,415,917) $ (129,074)
NET LOSS PER COMMON SHARE $ (.19) $ (.01)
LOSS APPLICABLE TO COMMON STOCK $(7,755,483) $ (159,224)
WEIGHTED AVERAGED NUMBER OF COMMON SHARES
OUTSTANDING DURING PERIOD 41,070,724 3,937,595
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
OPERATING REVENUES $ 582,829 $ 530,210
COST OF REVENUES 660,493 325,069
GROSS MARGIN (LOSS) (77,664) 205,141
OPERATING EXPENSES:
Selling, general and administrative 3,302,322 423,117
Research and development 790,234 0
Interest 5,127 0
4,097,683 423,117
(4,175,347) (217,976)
OTHER INCOME:
Investment income (loss) (98,848) 55,422
Other 0 72,728
Minority interest in loss of subsidiary 161,591 0
NET LOSS $(4,112,604) $ (89,826)
NET LOSS PER COMMON SHARE $ (.10) $ (.01)
LOSS APPLICABLE TO COMMON STOCK $(4,216,345) $ (99,876)
WEIGHTED AVERAGED NUMBER OF COMMON SHARES
OUTSTANDING DURING PERIOD 41,908,399 14,114,735
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(7,415,916) $(129,074)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Provision for bad debts 310,721 0
Minority interest in net loss of subsidiary (364,106) 0
Depreciation and amortization 784,696 193,831
Non marketable securities 792,127 0
Marketable securities received as payment of
preferred stock dividends 0 (41,425)
Changes in operating assets and liabilities:
Accounts receivable 255,781 40,969
Inventories (3,253,805) 33,671
Other operating assets (1,390,010) (17,197)
Accounts payable 1,800,562 97,572
Accrued expenses 1,255,953 (7,850)
Net cash provided (used) by operating activities (7,223,997) 170,497
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 477,690 0
Notes receivable repayments 50,000 171,500
Increase in notes, loans and advances (523,077) (300,000)
Property and equipment acquisitions (1,495,566) (580)
Net cash used by investing activities (1,490,953) (129,080)
CASH FLOWS FROM FINANCING ACTIVITIES:
Note repayments (100,898) 0
Preferred stock dividends paid (312,061) (36,900)
Proceeds from issuance of:
Common stock 295,620 0
Preferred Stock 10,000,000 209,250
Treasury stock acquisitions 0 (2,301)
Net cash provided by financing activities 9,882,661 170,049
EFFECT OF EXCHANGE RATE ON CASH 27,640 0
INCREASE IN CASH FOR THE PERIOD 1,195,351 211,466
CASH, beginning of period 9,838,998 633,509
CASH, end of period $11,034,349 $ 844,975
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NON-CASH ACTIVITIES:
NINE MONTHS ENDED
FEBRUARY 28 FEBRUARY 29
1997 1996
Existing business acquisition costs:
Issuance of common stock $ 543,292
Loans and advances applied
towards purchase price 1,946,380
$2,489,672
Components of acquired businesses, in
aggregate, are as follows:
Accounts receivable $ 534,448
Inventories 204,748
Property and equipment 222,952
Patents and patent rights 5,183,180
Other assets 4,188
Accounts payable and accrued expenses (1,028,515)
Current portion of notes and loans (1,119,838)
Long-term debt (804,885)
Other liabilities (83,134)
3,113,144
Less minority interest (623,472)
$2,489,672
Notes, loans and advances used to
retire debt of acquired business $1,253,620
Issuance of common stock:
Conversion of debt, net of unamortized
issue costs of $35,022 $ 714,978
Payment of accrued interest $ 16,439
Conversion of preferred stock $7,769,000 $ 150,000
Receipt of non-marketable securities
as payment of note receivable $ 750,000
Receipt of stock into treasury
in payment of note receivable $ 37,500
Receipt of marketable security as
payment of preferred stock dividend $ 41,425
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying 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 and
Regulation S.B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine and three
months ended February 28, 1997 are not necessarily indicative of the results
that may be expected for the year ending May 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended May 31, 1996.
The accounting policies followed by the Company are set forth in Note
1 to the Company's financial statements in the 1996 Mehl/Biophile
International Corporation and Subsidiaries Annual Report on form 10-KSB for
the year ended May 31, 1996.
2. BUSINESS ACQUISITIONS:
On June 4, 1996, in a transaction accounted for as a purchase, the
Registrant acquired, in the aggregate, 81% of the outstanding capital stock
of SLS (Wales) Limited, a privately held Welsh company ("SLS") engaged in
developing, manufacturing and selling lasers primarily in the field of hair
removal. The consideration for the acquisition of the SLS shares consisted
of a cash payment of 1,255,000 pounds sterling (approximately $1.9 million)
and the issuance of 25,044 shares of the Company's Common Stock. SLS holds
patents pending in the field of laser depilation. In accordance with the
terms of the agreement, funds of approximately $1,300,000, advanced by the
Company to SLS, were used to retire existing SLS debt. In recording the
purchase, the carrying value of SLS patent and patent rights was increased by
$3,837,000.
Additionally, on June 4, 1996, Classy Lady by Mehl of Puerto Rico, Inc. a
privately-held Puerto Rico company ("Classy Lady"), merged with and into a
wholly-owned subsidiary of the Company (the "Merger")The Merger has been
accounted for as a non-monetary exchange. As consideration for the Merger,
the Company issued an aggregate of 25,000,000 shares of Common Stock, $.01
par value per share, to the shareholders of Classy Lady.
In exchange for the issuance of the shares of the Company issued pursuant to
the Merger, the Company obtained all of the stock of Classy Lady, which owns
the exclusive licensing rights granted to Classy Lady by Thomas L. Mehl, Sr.,
for a multiple hair removal technology and by Dr. Nardo Zaias for a laser
hair removal technology. Valuation of the acquired patent rights, which was
based on the value of the stock issued as it was determined to be more
clearly evident, was $1,320,000. The acquired assets had no carrying value
in Classy Lady's financial statements.
3. INCOME TAXES:
For the nine and three months ended February 28, 1997 the Company's deferred
tax asset valuation allowance increased by approximately $2,300,000 and
$1,400,000, respectively, as a result of current period losses. The Company
recognized respective increases in its deferred tax asset valuation allowance
of approximately $40,000 and $57,000 for the nine and three months ended
February 29, 1996 which were attributable to additional losses for the
periods.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVENTORIES:
At February 28, 1997, inventories are comprised primarily of finished goods.
5. CAPITAL TRANSACTIONS:
Issuance of Series D Preferred Stock
On February 28, 1997, the Company completed a private placement offering
exempt under Regulation D promulgated under the Securities Act of 1933 of
10,000 shares of 5% Cumulative Convertible Preferred Stock, Series D, par
value $10 per share (the "Series D Preferred Stock"), for an aggregate
purchase price of $10,000,000. Holders of the Series D Preferred Stock are
entitled to receive dividends payable at the annual rate of 5%.
The Series D Preferred Stock is convertible into Common Stock of the
Company at 80% of the average market price on the five trading days prior to
conversion but in no event shall the conversion price be below $4.00 or
greater than the average market price on the five trading days prior to
February 28, 1997. On March 31, 1997 the Company filed a registration
statement covering the public sale of the shares of Common Stock receivable
upon conversion of the Series D Preferred Stock. The Series D Preferred
Stock may not be converted until the earlier of (i) the 120th day following
issuance and (ii) the date on which the aforementioned registration statement
is declared effective by the Securities and Exchange Commission. The
purchasers of the Series D Preferred Stock agreed not to sell or transfer the
Common Stock received upon conversion on or before February 28, 1998.
Common Stock Issuances:
In addition to the common shares issued related to the business acquisitions
(see Note 2), during the nine months ended February 28, 1997, the Company
issued 261,583 Common shares upon retirement of $750,000 convertible
debenture and related accrued interest of $16,383 and 2,562,621 shares upon
conversion of 7,769 shares of Series C, 5% cumulative convertible preferred
stock. Unamortized debt issue costs of $35,022 were charged to paid in
capital.
Additionally, 236,496 Common shares were issued during the period at $1.25
per share ($295,620 in aggregate) upon the exercise of outstanding stock
purchase warrants..
6. RECENT EVENTS:
On June 7, 1996 the Company entered into a Letter of Intent with Converting
Laboratories, Inc. (CLI), a Wisconsin corporation, located in Fond du Lac,
Wisconsin. CLI will be the primary manufacturer of the Company's consumer
multiple hair removal patch and is presently manufacturing, on an OEM basis,
consumer products and devices primarily related to the medical field, which it
will continue to do. Subject to entering a definitive agreement, the intent
of the parties is for the Company to purchase eighty-one percent (81%) of the
stock of CLI in exchange for one hundred five thousand (105,000) of the
common shares of the Company. An additional two hundred thousand shares
(200,000) will be issued to the owners of CLI according to certain
performance milestones to be included in the definitive agreement. To date,
the Company has advanced in the form of 6% interest bearing notes a total of
$668,736 to enable CLI to expand its facilities and acquire the necessary
equipment to ramp up and expand its manufacturing capabilities. The Company
anticipates its total cash investment in CLI, as revised, will be
approximately $900,000. The Company anticipates that CLI's continued
reliance for additional capital support will begin to diminish as
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. RECENT EVENTS: (continued)
CLI begins to manufacture and distribute the Company's new consumer hair
removal patch which is scheduled for market release sometime during the 4th
quarter of calendar 1997. At that time it is felt that CLI will be
generating a sufficient flow of cash to sustain its ongoing operation and
begin to retain profits.
On July 12, 1996 the Company entered into a Letter of Intent with Anton H.
Clemens ("Clemens"), a director of the Company, and Victor M. Haughton, M.D.
("Haughton"). The intent of the parties, subject to a definitive agreement,
is to have the Company form a new subsidiary, of which Clemens will be
president, having the exclusive worldwide license rights for the
development, manufacturing and marketing of a new and novel retractable
needle and catheter technology for the medical field protected by issued
United States and International Patents and by patents pending. As
consideration for the Company's entering into the Letter of Intent, the
Company agreed to 1) pay the sum of sixty-three thousand nine hundred dollars
($63,900) to cover related patent fees for the intellectual property, 2) have
the subsidiary pay Clemens and Haughton additional compensation in the form
of license fees or other moneys to be set forth in the definitive agreement
and 3) invest such additional funds necessary for the development,
manufacture and marketing of the intellectual property as set forth in the
definitive agreement. To date, the Company has advanced a total of $21,094
in furtherance of its commitments and objectives under the Letter of Intent.
On July 25, 1996 the Company entered into a Letter of Intent with GKS
Technologies, Inc. (GKS), a Puerto Rico corporation together with Gunner K.
Svanberg ("Svanberg"), a Director of GKS. Svanberg holds several patents
and patents pending worldwide for a new dental curret and curret sharpening
machine. The intent of the parties, subject to a definitive agreement, is to
develop, manufacture and market Svanberg's new curret devices within the
worldwide dental market. As consideration for the Company entering into this
Letter of Intent with Svanberg and GKS, the Company agreed to (1) subscribe
to One Hundred Thousand Shares (100,000) of GKS common stock at $.50 per
share for the sum of Fifth Thousand Dollars ($50,000) upon the execution of
the Letter of Intent; and (2) invest such additional funds necessary for the
development, manufacture and marketing of the Patent Applications according
to the terms set forth in the definitive agreement. Through February 28,
1997, the Company had advanced $99,592, including $50,000 to be applied
towards the purchase of GKS common stock under the terms outlined above.
Thomas L. Mehl, Sr., President and Chairman of the Company, personally owns
twelve and one-half percent (12.5%) of GKS as a result of his working with
Svanberg on patent applications over the past two years without any prior
compensation. M.C.M. Group, Inc., a Florida corporation owned by Thomas L.
Mehl, Sr., also owns twelve and one-half percent of GKS as a result of
providing management and consulting services to GKS and Svanberg over the
past two years without prior compensation.
On July 25, 1996 the company entered into a Letter of Intent with Applied
Genetics, Inc. (AGI), a New York Corporation. AGI has a patented liposome
delivery system for skin and hair. The intent of the parties is to enter
into definitive agreement for the express purpose of (1) the Company
retaining the services of AGI to prove the efficacy of those certain delivery
systems developed by Thomas L. Mehl, Sr. and Nardo Zaias, M.D. and (2) MEHL's
future strategic alliance with AGI for the purpose of obtaining additional
funding for AGI through private placement, initial offering or other
mezzanine funding. As of February 28, 1997, the Company had advanced to AGI
the sum of $150,000 for the provision of services pertaining to the efficacy
of those certain delivery systems discussed above.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. RECENT EVENTS: (continued)
Advances to CLI, Clemens and Haughton, and GKS of $428,082, in aggregate at
February 28, 1997 are included in loans and advances. The balance of the
advances to CLI & GKS as well as the payment to AGI have been
charged to operations and is included in research and development costs.
Payments related to the pending arrangement with Clemens and Haughton were
charged to operations.
On March 13, 1997, Selvac Acquisition Corp., a wholly owned subsidiary of the
Company, received marketing clearance from the Food and Drug Administration
(FDA) to market its proprietary long pulse ruby laser hair removal system in
the United States. The Company's subsidiary, SLS Biophile (SLS), has already
received full CE approval of marketing the system in Europe and other parts of
the world. The FDA decision was based upon safety and efficacy data from two
European studies, one Danish and one English, involving a total of 200 patients
with nearly 250 skin sites tested. As part of those studies it was noted that,
after an average of two treatments, approximately 80% of facial hair did not
return after a period of 190 days. No serious adverse effects were reported.
7. INVESTMENT INCOME (LOSS):
In November 1996 Roadrunner Video Group, Inc. (Roadrunner) filed for
protection under Chapter 11 of the US Bankruptcy Code. The Company realized
investment losses of $789,000 during the nine ended February 28, 1997 due to
the complete write down of its investment in preferred and common stock of
Roadrunner.
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<PAGE>12
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ACQUISITIONS:
On June 4, 1996, Classy Lady by Mehl of Puerto Rico, Inc., a privately-held
Puerto Rico Company ("Classy Lady"), merged with and into a wholly-owned
subsidiary of the Company (the "Merger"). In consideration for the Merger,
the Company issued an aggregate of 25,000,000 shares of Common Stock, $.01
par value per share, to the shareholders of Classy Lady. As a result of the
Merger, the former Classy Lady shareholders received, in the aggregate a
majority of the outstanding Common Stock of the Company, thereby resulting in
a change of control of the Company. Classy Lady owns the exclusive rights
which were granted by Dr. Nardo Zaias for laser hair removal technology and
Thomas L. Mehl, Sr. for radio frequency and direct current multiple hair
removal technology.
On June 4, 1996, the Company completed the purchase of capital stock
representing in the aggregate, an 81% interest in SLS (Wales) Limited, a
privately held Welsh company which has been renamed SLS Biophile Ltd.
("SLS"), engaged in developing, manufacturing and selling lasers for
dermatological use, including hair removal. SLS is presently the exclusive
manufacturer of all laser technology for the Company, including the CHROMOS
694 Ruby Laser used for professional hair removal and the Chromos 585 laser.
SUBSEQUENT ACQUISITION:
On March 18, 1997, the Company completed the purchase of capital stock
representing in the aggregate a 75% interest in Integrated Technologies
Research (Wales) Ltd., a privately held Welsh company which has been renamed
ITR Biophile Ltd. ("ITR"). ITR engages in the research and development of
software and related hardware in the following areas: 1) laser scanning
systems, 2) laser marking systems, 3) adaptive "Smart Card" read/write
technologies and 4) other highly sophisticated related technological areas.
ITR was the originator of the present scanning system and smart card
technologies utilized in the CHROMOS 694 Ruby Laser. Under the terms of the
Definitive Agreement, the shareholders of ITR received 250,000 shares of
common stock of the Company for the 75% interest in ITR.
LIQUIDITY AND CAPITAL RESOURCES:
At February 28, 1997, the Company's cash balance of $11,034,349 represented
an increase of $1,195,351 from May 31, 1996.
Cash was used to fund the Company's operations, preferred stock dividend
payments, the purchase of equipment and inventory (Primarily for use in SLS
production), and advances to prospective acquisition candidates. The cash
used was offset by a private placement of convertible preferred stock which
generated $10,000,000.
Management anticipates increased production of the SLS laser products and a
corresponding increase in its inventory. Production facilities in Wales are
considered adequate to meet short term production needs. The Company will
continue to utilize its resources to finance the expected increase in
production and inventory and may be looking to finance the growth through
other means of financing.
The Company anticipates that its present level of working capital will be
sufficient to enable it to carry out its near and mid range plans but does
anticipate that it will require additional funds to complete its long term
business strategy. The Company plans to achieve its objectives through
either private or public offering of equity or debt. The Company is also
investigating long term financing for the purchase and subsequent placement
of its lasers.
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<PAGE>13
LIQUIDITY AND CAPITAL RESOURCES: (continued)
During the past nine months 7,769 shares of the Company's 5% cumulative
convertible, Series C preferred shares were converted into 2,562,621 of
common shares. The Purchasers have agreed not to sell or transfer the
shares before February 28, 1998. Between November 30, 1996 and December 27,
1996, warrants to purchase 73,158 shares of common shares were exercised,
resulting in gross proceeds to the Company of $91,447. The remaining
warrants expired on December 27, 1996.
RESULTS OF OPERATIONS:
Revenues for the nine months ended February 28, 1997 were $2,420,027, an
increase of 51.6% over the $1,596,312 for the nine months ended February 29,
1996. Revenues for the three months ended February 28, 1997 were $582,829,
an increase of 9.9% over the $530,210 for the three months ended February 29,
1996. The increase is almost exclusively a result of the acquisition of SLS
in June, 1996.
The gross margin percentage decreased 6.6% to 33.8% for the nine months ended
February 28, 1997 as compared to the 40.4% for the nine months ended February
29, 1996. The gross margin percentage decreased 52.0% to (13.3)% for the
three months ended February 28, 1997 as compared to the 38.7% for the three
months ended February 29, 1996. The year-to-year and quarter-to-quarter
decrease is the result of a one time write-down of $275,000 in inventory of a
discontinued product line.
Selling, general and administrative expense for the nine months ended
February 28,1997 were $6,694,452, an increase of 615.8% over the $935,183 for
the nine months ended February 29, 1996. For the three months ended February
28, 1997 selling, general and administrative expense was $3,302,322 an
increase of 680.5% over the $423,117 for the three months ended February
29,1996. The increased selling, general and administrative expense is
attributable to the merger with Classy Lady and the acquisition of SLS which
required the Company to increase its expenditures on administrative staff,
legal expense, patent fees, and travel, and increased depreciation and
amortization which does not present a meaningful comparison to prior periods.
Research and development costs for the nine months and three months ended
February 28, 1997 were $1,484,013 and $790,234 respectively compared to
no costs for the corresponding periods of the previous year. This
is a result of a change in the Company's strategy from a consumer products
orientation to a technology company that will continue to incur
research and development costs in order to insure that it maintains
technological superiority in its market.
Investment loss for the nine months ended February 28, 1997 was $396,721
compared to an investment gain of $87,767 for the nine months ended February
29, 1996. Investment loss for the three months ended February 28, 1997 was
$98,848 compared to an investment gain of $55,422 for the three months ended
February 29, 1996. The current year losses were attributable to the complete
write down of the Company's investment of $750,000 in preferred and $39,000
common stock of Roadrunner Video Enterprises, Inc. offset by interest
income.
Minority interest for the nine and three months ended February 28, 1997 was
$364,106 and $161,591 respectively. This amount represents the portion
not attributable to the Company's interest in SLS.
Net loss for the nine and three months ended February 28, 1997 were
$7,415,917 and $4,112,504 respectively as compared to losses of $129,074 and
$89,826 for the corresponding periods of the previous year. The increased
losses resulted from the factors discussed above.
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<PAGE>14
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS:
This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21B of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might
cause such a difference include those discussed below.
The Company's future results of operations initially depend to a substantial
degree on the ability of the Company to license parties worldwide to utilize
the CHROMOS 694 Ruby Laser manufactured by SLS and for such licenses to
successfully sell hair removal services utilizing this product. The ability
of such licensees to market such services will in part depend on the public's
acceptance of the use of lasers to remove hair, as to which there can be no
assurance, and the strength of the Company's competitors. The Company's
existing or potential competitors have or may have substantially greater
research and development capabilities, clinical, manufacturing, regulatory
and marketing experience and financial and managerial resources than the
Company. The company may be required to find alternative means for marketing
and selling its laser hair removal services, and thereby experience
substantial delays and costs. No assurance can be given that the Company
would be able to find an acceptable alternative means of marketing and
selling its laser hair removal system, or if such an alternative means was
found, that it would be successful.
- -14-
<PAGE>15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 5, 1996, the Company's wholly-owned subsidiary, Selvac
Acquisition Corp. ("SAC"), commenced an arbitration with the American
Arbitration Association in New York, New York to terminate a joint venture
with Laser Industries Limited ("Laser"). The joint venture was formed in
December 1995 when Laser and Classy Lady by Mehl of Puerto Rico, Inc.
("Classy Lady"), which merged with and into SAC and is now 100% owned by the
Company, entered into an agreement to exploit patented laser hair removal
technology exclusively licensed to Classy Lady. The joint venture, Sharplan
2000, Inc. ("Sharplan 2000"), is 50% owned by SAC and 50% by Laser and is
managed exclusively by Laser. SAC commenced the arbitration to terminate the
license granted to Sharplan 2000 and unwind the joint venture. SAC is basing
this action on a dispute concerning the nature of technological and financial
contributions to be made to the joint venture by Laser and an additional
dispute concerning whether Laser utilized technology within the joint venture
which was in fact developed by SLS Wales Ltd., ("SLS") prior to the purchase
by the Company of a controlling interest in SLS in June 1996.
On December 23, 1996, Laser asserted two counterclaims in the arbitration
proceedings, claiming that the Company has breached an alleged fiduciary duty
owed to Laser and Sharplan 2000 and seeking a declaration that SAC may not
grant a sublicense of certain patent rights to SLS. The Company has filed a
response to these counterclaims requesting dismissal on the grounds that
neither claim is arbitrable.
In a separate action filed in England in October, 1996, SLS commenced an
action against Laser, a laser manufacturer, Spectron Laser Systems Ltd.
("Spectron") and related parties, for orders preventing Laser from using
SLS's technology and stopping Spectron from supplying SLS's technology to
Laser.
Management believes that the actions commenced by its subsidiaries and
described above are well-founded, that the counterclaims filed by Laser in
the arbitration proceeding are without merit and that its subsidiaries will
prevail in both actions.
In March 1997, SAC filed suit against Palomar Medical Technologies, Inc.
("Palomar") and its subsidiaries, Spectrum Medical Technologies, Inc.,
Spectrum Financial Services LLC, and a new Jersey dermatologist for patent
infringement and unfair competition. The suit was filed in the United States
District court for the District of New Jersey and alleges that the defendants
infringe on the patented method of laser hair removal owned by Dr. Nardo
Zaias and exclusively licensed to SAC and that the defendants have improperly
marketed laser hair removal products before receiving FDA approval. The
plaintiff is seeking monetary damages and injunctive relief to restrain
Palomar from marketing its laser hair removal products in the United States.
While management is confident that the actions brought against the above
defendants are well-founded and that SAC will prevail in this proceeding, the
litigation is only in its initial stages. In March 1997, Palomar served the
Company with a lawsuit which it filed in the United States District Court in
Massachusetts seeking to declare the patent embodying the laser hair removal
technology exclusively licensed by SAC to be declared invalid. Further
amendments to this action have also been sought by Palomar. The Company has
moved to dismiss the Massachusetts action and counsel for Palomar has agreed
to its dismissal. It is likely however that the assertion of invalidity will
be raised in the Company's New Jersey actions against Palomar. Management of
the Company is confident that the validity of its patent will be upheld.
- -15-
<PAGE>16
ITEM 2. CHANGES IN SECURITIES:
SERIES D PREFERRED STOCK:
On February 28, 1997, the Company completed a private placement offering
exempt under Regulation D promulgated under the Securities Act of 1933 of
10,000 shares of 5% Cumulative Convertible Preferred Stock, Series D, par
value $10 per share (the "Series D referred Stock"), for an aggregate
purchase price of $10,000,000. Holders of the Series D Preferred Stock are
entitled to receive dividends payable at the annual rate of 5% per annum.
The Company intends to utilize the proceeds of the offering for working
capital and general corporate purposes.
The Series D Preferred Stock is convertible into Common Stock of the Company
at 80% of the average market price on the five trading days prior to
conversion but in no event shall the conversion price be below $4.00 or
greater than the average market price on the five trading days prior to
February 28, 1997. The Company filed a registration statement covering the
public sale of the shares of Common Stock receivable upon conversion of the
Series D Preferred Stock on March 31, 1997. The Series D Preferred Stock may
not be converted until the earlier of (i) the 120th day following issuance
and (ii) the date on which the aforementioned registration statement is
declared effective by the Securities and Exchange Commission. The purchasers
of the Series D Preferred Stock agreed not to sell or transfer the Common
Stock received upon conversion on or before February 28, 1998.
SERIES C PREFERRED STOCK:
The Company has been advised that the investors who purchased the Series D
Preferred Stock, Clearwater Fund IV, LLC and Clearwater Offshore Fund Ltd.,
are commonly controlled with GFL Performance Fund Ltd. ("GFL"), the holder
of all outstanding shares of the Company's 5% Cumulative Convertible Preferred
Stock, Series C (the "Series C Preferred Stock"). In connection with the
sale of the Series D Preferred Stock, the Company entered into an agreement
with GFL whereby (i) GFL agreed not to sell or transfer the Common Stock
issuable upon conversion of the Series C Preferred Stock on or before February
28, 1998, and (ii) the Company, acting upon unanimous approval of the Board
of Directors and by the written consent of the holders of a majority of the
Company's Common Stock, agreed to fix the conversion price of the Series C
Preferred Stock at $3.00, and to adjust the conversion price of the Series C
Preferred Stock in the event that the Company issues Common Stock in the
future at a price of less than $3.00. In addition, the Company agreed
to remove a restriction in the Company's Certificate of Incorporation which
prohibited conversion of the Series C Preferred Stock, if after such
conversion the number of shares of Common Stock beneficially owned by such
holder would exceed 4.9% of the issues and outstanding Common Stock of the
Company. The Company has been advised that GFL currently owns 2,000,000
shares of Common Stock received upon conversion of the Series C Preferred
Stock, and GFL would not be able to convert a substantial number of additional
remaining 2,231 shares of Series C Preferred Stock into Common Stock without
the removal of this restriction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibit is included herein:
Exhibit 11: Statement re: computation of net income per common
share
(b) Reports on Form 8-K:
None
- -16-
<PAGE>17
SIGNATURE
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.
MEHL/BIOPHILE INTERNATIONAL CORPORATION
DATE: April 14, 1997 BY: (s) Thomas L. Mehl, Sr.
Thomas L. Mehl, Sr.
Chairman of the Board and
Chief Executive Officer
- -17-
<PAGE>18
MEHL/BIOPHILE INTERNATIONAL CORPORATION
Exhibit (11) Statement re: Computation of New Income Per Common Share
(Unaudited)
Computation of average number of shares outstanding used in determining
primary and fully diluted earnings per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
FEBRUARY 28, February 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average number of shares
outstanding 41,070,724 13,937,595 41,908,399 14,114,735
Assumed exercise of common stock
warrants and certain stock
options based on average market
value * * * *
Weighted average number of shares
used in primary per share
computations 41,070,724 13,937,595 41,908,399 14,114,735
FULLY DILUTED:
Weighted average number of shares
outstanding 41,070,724 13,937,595 41,908,399 14,114,735
Assumed conversion of cumulative
convertible stock:
Series A*
1985 Series*
Series C*
Series D*
Assumed exercise of common stock
warrants and certain options
based on higher of average or
closing market price* __________ __________ __________ _________
Weighted average number of shares
used in fully diluted per share
computations 41,070,724 13,937,595 41,908,399 14,114,735
* Not considered in the computation as their effect on earnings per share would be
anti-dilutive.
</TABLE>
- -18-
<PAGE>19
MEHL/BIOPHILE INTERNATIONAL CORPORATION
Exhibit (11) Statement re: Computation of Net Income Per Common Share
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
FEBRUARY 28, February 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 41,070,724 13,937,595 41,908,399 14,114,735
Fully diluted 41,070,724 13,937,595 41,908,399 14,114,735
PRIMARY:
Net loss $(7,415,917) $ (129,074) $(4,112,604) $ (89,826)
Paid and cumulative undeclared
preferred stock dividends (339,566) (30,150) (103,741) (10,050)
Net loss applicable
to common stock $(7,755,483) $ (159,224) $(4,216,345) $ (99,876)
Net loss per share $ (.19) $ (.01) $ (.10) $ (.01)
FULLY DILUTED:
Net loss per share $ * $ * $ * $ *
*Not calculated as the effect would be anti-dilutive.
- -19-
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT INCLUDED IN PART I, ITEM 1 OF
THE REGISTRANT'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED
FEBRUARY 28, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 11,034,349
<SECURITIES> 0
<RECEIVABLES> 1,132,490
<ALLOWANCES> 654,137
<INVENTORY> 3,856,300
<CURRENT-ASSETS> 15,989,143
<PP&E> 2,693,758
<DEPRECIATION> 1,085,622
<TOTAL-ASSETS> 23,765,353
<CURRENT-LIABILITIES> 4,343,062
<BONDS> 0
<COMMON> 462,183
0
12,231,000
<OTHER-SE> 6,469,742
<TOTAL-LIABILITY-AND-EQUITY> 23,765,353
<SALES> 2,420,027
<TOTAL-REVENUES> 2,420,027
<CGS> 1,601,035
<TOTAL-COSTS> 1,601,035
<OTHER-EXPENSES> 8,599,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,829
<INCOME-PRETAX> (7,415,917)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,415,917)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,415,917)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
