<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
Commission file number 1-9206
------
ENTOURAGE INTERNATIONAL, INC.
(Name of Small Business Issuer in its Charter)
Texas 76-0118305
----- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
32240 Paseo Adelanto Ste A
--------------------------
San Juan Capistrano CA 92675
---------------------- -----
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code (714) 488-2184
--------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock. $.001 par value
- -----------------------------
(Title of Class)
- ----------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15 (d) of the Securities Exchange Act of 1934 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 [_] No [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $1,494,864.
As of September 30, 1996, the aggregate market value of the issuer's common
stock, $.001 par value, held by nonaffiliates of the issuer, is $147,023
computed based upon bid and ask quotes averaging $.04 per share. No active
trading market exists.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1 Description of Business.................................................................... 3-7
Item 2 Description of Property.................................................................... 7
Item 3 Legal Proceedings.......................................................................... 7-8
Item 4 Submission of Matters to a Vote of Security Holders........................................ 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters................................... 8
Item 6 Management's Discussion and Analysis of Plan of Operations................................ 9-11
Item 7 Financial Statements....................................................................... 12-27
Item 8 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure...... 28
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16 (a) of the Exchange Act................................................................. 29-30
Item 10 Executive Compensation..................................................................... 31
Item 11 Security Ownership of Certain Beneficial Owners and Management............................. 32-34
Item 12 Certain Relationships and Related Transactions............................................. 34
Item 13 Exhibits, Lists and Reports on Form 8-K.................................................... 35-36
</TABLE>
2
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
--------------------
Entourage International, Inc. ("Entourage" or "the Company") is a
Texas corporation which commenced operations in 1984.
The Company's most significant operations involve the sale of
Biozhem Skin Care Products, formerly Biogime Skin Care, which it
distributes through a network of retail stores. The Company enters into
marketing and distribution agreements with manufacturers of specific
products or product lines and resells those products through company-owned
retail stores and licensed or franchised retail stores.
On December 21, 1995, the Company transferred its 100% common
interest in Biogime International, Inc. "Biogime", a wholly owned
subsidiary, to certain shareholders of Entourage in exchange for 1,050,000
shares of Entourage common stock. Biogime marketed skin care, health and
nutritional products through a network of independent distributors.
On January 31, 1997, the Company, through a wholly owned
subsidiary, BFS Acquisition Corp. "BAC", entered into an agreement and plan
of merger with the shareholders of Biogime Franchise Services USA, Inc., a
company owned by an Officer/Director of the Company, whereby BFS was merged
into BAC. As a result of the merger, BAC acquired all of the assets of BFS
amounting to $362,452 and assumed all of the liabilities of BFS amounting
to $184,701. The assets included a $175,000 promissory note payable by the
Company to BFS which was due on demand. Following the merger, this
indebtedness was canceled. The merger consideration consisted of 7,500,000
shares of common stock issued to the shareholders of BFS.
Business of Issuer
------------------
A. PRODUCTS
The company markets Biozhem skin care products.
Biozhem Skin Care Products: The Company's primary products are a
--------------------------
series of skin care formulations marketed and sold using the name Biozhem.
Sales in the Biozhem product line consist primarily of the five-step
"Woman's Skin Care System". This five-step process is specially formulated
to clean and condition the skin. The formulation consists of all natural
ingredients and the Company has eliminated certain ingredients which are
known to be damaging to the skin. The Biogime name was used for the
fifteen months following the December 21, 1995 transfer of the direct sales
division, after which the name "biozhem" was used by Entourage. (See notes
to financial statements)
3
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B. DISTRIBUTION
At September 30, 1996 Biozhem skin care products are marketed
through five Company-owned retail stores and eight franchised and licensed
retail stores. Products were also marketed through a network of independent
distributors and twelve licensees outside the United States prior to
December 21, 1995.
(1) Company-owned Retail Stores
---------------------------
During fiscal 1996, the Company operated six Company-owned retail
stores under the name Biogime Skin Care Center. Sales through Company-owned
retail stores were 82% and 81% of total sales in the fiscal years ended
September 30, 1996 and 1995 respectively. The locations with opening and
closing dates (during the current and previous fiscal years) of the
Company-owned and operated retail stores as of September 30, 1996 were:
Dallas, Texas (March 1991)
Phoenix, Arizona (March 1992)
San Jose, California (March 1993)
Denver, Colorado (March 1993)
Tampa, Florida (April 1993)
Chicago (Oakbrook), Illinois (September 1993) (Closed
September 1996)
Baltimore (Lutherville), Maryland (February 1994) (Closed
March 1995)
Detroit (Birmingham), Michigan (March 1994) (Closed
January 1995)
Philadelphia (Bryn Mawr), Pennsylvania (May 1994) (Closed
February 1995)
The San Jose store was acquired from a franchisee; other stores
were opened by the Company.
Management evaluated the profitability of all its retail stores
and closed unprofitable stores in Baltimore, Detroit and Philadelphia in
January, February and March of 1995 and Chicago in September of 1996. These
stores had shown losses since their opening, and management had identified
them as part of the overall restructuring. The Company will continue to
evaluate the profitability and continued operations of the other retail
stores.
Entourage uses 30-minute "Infomercial" television programs in
all the areas served by the Company-owned Biozhem retail stores which
describe the Biozhem skin care products. Management continues to evaluate
the effectiveness of the "Infomercials" as an advertising medium as well as
direct mail campaigns.
(2) Franchised and Licensed Retail Stores
-------------------------------------
Biogime products have been distributed through eight franchised
retail stores under the Biogime Skin Care Center name through September 30,
1996. Their operations were the responsibility of BFS until January 31,
1997, when BFS was acquired by the Company. These retail stores are located
in California, Oklahoma, Hawaii and Georgia.
Entourage and, since May 2, 1994, BFS have filed Franchise
Offering Circulars as required by the State of California. BFS has
developed an offering circular as required by the Federal Trade Commission
for other states.
4
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Sales to franchised and licensed retail stores (through May 2,
1994) and sales to BFS (from May 2, 1994 through September 30, 1996) were
18%, 19%, and 15% of total sales for the fiscal years ended September 30,
1996, 1995 and 1994 respectively.
(3) Direct Sales Through Independent Distributor Network
----------------------------------------------------
The direct sales division was discontinued in connection with the
December 21, 1995 transfer of the Company's interest in Biogime
International, Inc. to certain shareholders. Prior to the discontinuance,
the direct sales division sold Biogime products to independent
distributors for resale to their customers and to persons recruited and
trained, as down-line distributors. Direct sales through the independent
distributor network amounted to $315,602 and $987,232 for the period from
October 1, 1995 to December 21, 1995 and for the fiscal year ended
September 30, 1995, respectively.
(4) International Export Operations
--------------------------------
International export sales were also discontinued in connection
with the transfer of the Company's interest in Biogime International, Inc.
to certain shareholders.
Prior to the discontinuance, the Company had licensees in Sweden,
Guatemala, New Zealand, Korea, Norway, Denmark, Malaysia/Singapore, Hong
Kong, Spain, El Salvador, Thailand and Mexico. The Company considered
international licensee opportunities as long-term and devoted few of its
resources to this division.
C. COMPETITION
Entourage competes with a large number of companies and product
lines in the states in which its products are sold. Many competitive
companies are well established and have research, financial and
manufacturing capabilities and other resources substantially greater than
those of Entourage. Retail competition consists of major cosmetic companies
such as Estee Lauder, Clinique and Lancome and national retailers such as
Body Shop and Garden Botanica.
Entourage has developed extensive training materials to acquaint
retail store employees with effective sales techniques and the various
aspects of the Company's products. In addition, the Company offers fewer
products than those of its national competitors, and its retail store
employees therefore focus on the sale of fewer types of products or product
lines. As a result, the Company believes its retail store employees have a
greater knowledge and understanding of the Company's products which permits
a more thorough and effective sales presentation from the retail store
employee to the customer.
5
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D. SUPPLIERS
The Company has an agreement with Arizona Natural Resources,
Inc. ("ANR"), whereby Entourage has ANR produce a series of skin care
formulations known as Biozhem. Under the agreement with ANR, ANR is
committed to supervise the manufacture (including, without limitation, the
bottling and packaging) of the multi-step skin care formulations, and to
produce and deliver to the Company the full requirements of the Company
with respect to those products. Entourage is required to pay ANR an amount
per bottle ordered, as stipulated in the agreements, and all shipping and
delivery costs. The agreement does not contain provisions which would
require the Company to purchase minimum volumes thereunder. This agreement
is currently contracted on a month-to-month basis.
The Company maintains its inventory at a warehouse in San Juan
Capistrano, California. Additionally, small amounts of inventory are
stocked at the Company-owned retail stores. Inventory is financed through
internally-generated funds, its working capital line of credit and credit
extended from ANR. The majority of the inventory is sold for cash.
Merchandise is shipped directly from the San Juan Capistrano, California
warehouse to distributors or retail stores.
The Company extends a 90-day return policy which permits
distributors and retail customers to return merchandise on an initial
order in exchange for cash (less a restocking charge) or replacement
merchandise.
E. PATENTS, TRADEMARKS AND COPYRIGHTS
The Company utilizes no patents or copyrights in connection with
any of its operations. The Company operates under a trademark registration
for "Entourage". The trademarks "Biogime" and "Biogime Skin Care Center"
were being used in the United States until March 21, 1997. The service
marks, trade name Biogime, the design logo and the three Federal trade-mark
registrations relating to Biogime were transferred to Biogime in the
December 21, 1995, transfer of the Company's interest in Biogime to certain
shareholders. As part of this agreement, a consent agreement was signed by
the Company and Biogime allowing the Company to use the Biozhem mark
concurrently with Biogime's use of the Biogime marks. The Company seeks to
protect its proprietary interests in its products by applying for patents,
trademarks and/or copyrights as circumstances warrant.
F. GOVERNMENT REGULATIONS
(1) Products
--------
Certain federal agencies regulate, among other things, the
purity and packaging of cosmetic products. Similar regulations are in
effect in various states. Manufacturers and distributors of cosmetic
products are also subject to the jurisdiction of the Federal Trade
Commission with respect to such matters as advertising content and other
trade practices. The Company has entered into private cosmetics labeling
agreements only with non affiliated manufacturers that manufacture products
in a manner which complies with such regulations and who have submitted or
intend to submit their products periodically to independent laboratories
for testing. However, the extent of potentially adverse governmental
regulations which might arise from future legislation or administrative
action cannot be predicted.
6
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(2) Direct-to-Consumer Marketing
----------------------------
Direct-to-consumer marketing programs are subject to regulation
by various governmental regulatory agencies. On the state level, such
programs may be subject to regulation under various statutes governing
business opportunities, franchises, consumer protection, multi-level
distribution programs, securities and pyramid schemes. On the federal
level, direct-to-consumer marketing programs may be regulated by the
Federal Trade Commission as franchises, and by the United States Post
Office through lottery and fraud statutes. Both civil and criminal
penalties are imposed for violations of these state and federal statutes,
and many provide for private rights of action by individual claimants.
G. EMPLOYEES AND CONSULTANTS
Entourage employs 11 full-time and 7 part-time persons, one of
whom is an officer and director of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 2,400 square feet of office and warehouse
space within a business park setting in San Juan Capistrano, California.
The Company also leases retail space for each Company-owned retail center
which it operates as a Biozhem Skin Care Center in the various locations.
Generally, retail stores are located in small, upscale shopping centers
with 700 to 1,000 square feet of space each. The total lease commitments
are $100,000, $27,000 and $2,000 in fiscal years 1997, 1998 and 1999
respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company was sued on June 14, 1996, by Biogime International,
Inc. (the Plaintiff) in the United States District Court for the Southern
District of Texas, Houston, Texas, for damages related to alleged breaches
of the master transaction agreement and the standstill agreement signed in
December 1995. The Plaintiff claimed damages in the amount of at least
$100,000 for the Company's alleged failure to make required payments due
April 5, 1996, May 5, 1996, and June 6, 1996, under the master transaction
agreement and for the Company's failure to pay for legal fees called for in
the agreement. The plaintiff also claimed that the Company had violated the
standstill agreement by advertising in areas prohibited under the agreement
and requested that the Company be enjoined from further breaches of the
agreement. Attorney fees and court costs were also claimed in the suit by
the Plaintiffs. On November 20, 1996, a release and settlement agreement
was signed by the Company and the Plaintiff settling all claims and causes
of action that the companies had or in the future could have that were in
any way connected with the agreements. As a result of the settlement
agreement, the Company paid a one time amount to Biogime International,
Inc. of $20,000 and the plaintiff agreed to comply with certain competitive
restrictions. The plaintiff also agreed to provide certain documents and
signatures called for in the previous agreements. On February 18, 1997, an
agreed order of dismissal with prejudice was filed in the District Court
Harris County, Texas, 61st Judicial District.
7
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The Company is subject to certain claims arising in the ordinary
course of business. In the opinion of management of the Company, the
amounts ultimately payable, if any, as a result of such claims will not
have a material adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of its 1996 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Historically, the Company's common stock was traded in the over-
the-counter market of NASDAQ under the symbol "ENTG". On January 23,
1991, the Company was notified that its stock was delisted from the NASDAQ
system because of the limited number of firms making a market for the
Entourage stock under the NASDAQ system. Though there is still a limited
market in the Company's common stock, there have been sporadic bid prices
quoted during fiscal year 1996. The following table sets forth the high
and low bid prices of Entourage common stock for the periods shown.
Information on December, March and June quarters is not available.
<TABLE>
<CAPTION>
Quarter Ended Bid Prices
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Low High
<S> <C>
September 30, 1996 $.02 $.06
September 30, 1995 .04 .04
</TABLE>
The above quotations reflect inter-dealer prices, without retail
mark-up, markdowns or commission, and may not necessarily reflect actual
transactions.
As of June 30, 1997, there were approximately 600 record holders
of the Company's common stock.
Entourage has paid no dividends on its common stock and has no
present plans to do so. Entourage's Board of Directors intends to retain
earnings, if any, to finance the growth and development of the business of
Entourage. Any payment of cash dividends in the future will be at the
discretion of the Board of Directors and will depend upon the financial
condition, capital requirements and earnings, if any, of Entourage, as well
as other factors which the Board of Directors may deem relevant.
8
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
PLAN OF OPERATION
General
-------
In December 1994, the Company acquired from Petrolon (the Seller)
certain assets of a product line marketed using the name "Swipe" for
$300,000 and received from the Seller, a working capital loan in the amount
of $250,000. A convertible note in the principal amount of $550,000 was
issued in exchange for the product line and working capital advance. In
December 1995, the convertible note and related accrued interest were
canceled in exchange for 300 shares of the preferred stock of Biogime
International, Inc. held by the Company. An extraordinary gain of $543,000
was recognized on the debt extinguishment.
On December 21, 1995, the Company entered into an agreement to
transfer 100% of the common stock of Biogime International, Inc. (BII), a
wholly owned subsidiary that operated as the Company's direct sales
division, to certain Entourage shareholders in exchange for 1,050,000
shares of Entourage common stock. Mutual non-competition agreements for a
period of five years were executed and an agreement was reached between the
parties allowing Entourage to use the secondary mark and logo "Biozhem" in
connection with the operation of its business. No gain or loss was
recognized on the transfer.
As a result of the transfer, Entourage's operations consist
principally of marketing skin care products through its traditional retail
channels which include retail stores. BII, an unrelated entity, markets
skin care products and health and nutritional products through independent
distributors in the United States and directly markets such products
internationally.
BII's results of operations have been classified as discontinued
operations for all periods presented in the accompanying financial
statements. Following is summarized financial information for BII for the
years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net sales $315,602 $ 987,232
Gross profit $170,137 $ 436,346
Net loss $(66,374) $(239,527)
</TABLE>
The Company was sued by BII on June 14, 1996 for damages related
to alleged breaches of certain agreements signed on December 21, 1995. A
settlement was reached on November 20, 1996 under which the Company paid
$20,000 to BII.
The Company closed one of its retail stores in September 1996.
The closure resulted in a charge of $27,000 for the write-off of leasehold
improvements and other assets, inventory, settlement of lease commitments,
severance payments and related legal fees. Net sales from the store were
less than $67,000 and $96,000 in 1996 and 1995, respectively.
9
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On January 31, 1997, the Company, through a wholly owned
subsidiary, entered into an agreement and plan of merger with the
shareholders of Biogime Franchise Services USA, Inc. (BFS), a company owned
by an Officer/Director of the Company. As a result of the merger, the
Company acquired all of the assets of BFS, amounting to $362,452, and
assumed all the liabilities of BFS, amounting to $184,701, in exchange for
7,500,000 shares of Entourage common stock.
LIQUIDITY
---------
The Company has experienced severe liquidity shortages beginning
in August 1994. A lack of growth in direct sales, lower than anticipated
retail sales and profitability and legal expenses incurred in connection
with the BII transfer contributed to the deterioration of the Company's
liquidity and capital position. Current liabilities exceed current assets
by $539,784 and $449,684 at September 30, 1996 and September 30, 1995,
respectively. In addition, cash balances declined from $33,405 at
September 30, 1995 to $0 at September 30, 1996.
In connection with the disposal of the discontinued operations,
trade payables and debt of approximately $272,000 and $200,000
respectively, were assumed by Biogime (BII).
Subsequent to the disposal, Biogime Franchise Services (BFS), a
related party, loaned the Company approximately $200,000. The loan was
subordinate to certain vendor financing, bore interest at 8% per annum and
was due on demand. The indebtedness was canceled in connection with the
Company's acquisition of BFS in January 1997.
As of September 1, 1997, the Company obtained a $50,000 operating
line of credit. However the Company must still rely on operating cash flow
and cash management to sustain its operations. The Company's 1997 operating
plan contemplates improved operating results and cash flow. Through
September 1, 1997, the Company received approximately $292,500 in
additional equity financing. If management cannot achieve its 1997
operating plan because of sales shortfalls or other unfavorable events, the
Company may find it necessary to further reduce expenses or undertake other
actions as may be appropriate.
OPERATIONS -- 1996 COMPARED TO 1995
-----------------------------------
Entourage incurred a loss from continuing operations of $298,044
in 1996 compared to a loss from continuing operations of $478,857 in 1995.
The 1996 loss includes legal and consulting expenses of approximately
$167,315 related to the disposition of Biogime International, Inc.
Net sales in 1996 decreased by $368,416 or 24% as compared to
1995 due mainly to the closure of four retail stores in 1995 and 1996 and
lower franchise sales. Company owned stores accounted for 82% and 81% of
total net sales in 1996 and 1995, respectively. Franchised and licensed
stores accounted for 18% and 19% of total net sales in 1996 and 1995,
respectively. Although total net sales at Company owned stores decreased by
$304,000 in 1996 as compared to 1995, average monthly sales per Company
owned store increased from $12,000 in 1995 to $13,000 in 1996.
10
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Gross profit in 1996 decreased by $286,252 or 23% as compared to
the corresponding amount for 1995. Gross profit as a percentage of net
sales increased slightly to 83% in 1996 from 82% in 1995. Gross profit as a
percentage of net sales at Company owned stores was 86.5% and 86.4% in 1996
and 1995, respectively, and 67.8% and 61.3%, respectively, for sales to
franchise stores.
Selling, general and administrative expenses decreased by
$423,755, or 26%, in 1996 as compared to 1995 due primarily to expense
reductions implemented after the disposal of Biogime International, Inc.
Depreciation and amortization decreased in 1996 by $30,102 and
$12,772 respectively, as compared to the 1995 amounts. The decreases were
due primarily to the disposal of Biogime International, Inc.
At September 30, 1996, the Company had a federal net operating
loss carryforward of approximately $3,400,000. If not used to offset future
taxable income, these loss carryforwards will expire between 2002 and 2011.
Pursuant to the Tax Reform Act of 1986, use of the Company's net operating
loss carryforwards may be substantially limited if a cumulative change in
ownership of more than 50% occurs within a prescribed testing period.
Equity transactions in 1996 and 1997 may have resulted in such a change and
would likely result in a limitation of the amount of net operating loss
that may be used annually. Further, the limitation may render a substantial
portion of the Company's net operating loss carryforwards unusable.
Based on numerous factors but not limited to the Company's
historical losses, management believes that it cannot demonstrate that it
is more likely than not that it will fully realize all of the benefits of
deferred tax assets existing at September 30, 1996. Accordingly, a
valuation allowance has been provided for the full amount of the Company's
deferred tax assets.
11
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Item 7: Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors...................................... 13
Balance Sheets September 30, 1996 and 1995......................... 14
Statements of Operations Years ended September 30, 1996 and 1995... 15
Statements of Stockholders' Equity (Deficit) Years ended
September 30, 1996 and 1995......................................... 16
Statements of Cash Flows Years ended September 30, 1996 and 1995... 17
Notes to Financial Statements....................................... 18-27
</TABLE>
12
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Report of Independent Auditors
Board of Directors and Stockholders
Entourage International, Inc.
We have audited the accompanying balance sheet of Entourage International, Inc.
as of September 30, 1996 and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the management of Entourage International,
Inc. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entourage International, Inc.
at September 30, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully disclosed in Note 1 to
the financial statements, the Company's recurring operating losses and working
capital and stockholders' equity deficiencies raise substantial doubt about its
ability to continue as a going concern. Management's plans as to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Ernst & Young LLP
Orange County, California
June 23, 1997, except note 12 as to which
the date is September 1, 1997
13
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Entourage International, Inc.
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ - $ 33,405
Trade accounts receivable 11,080 5,039
Inventory 51,485 213,971
Prepaid expenses and other current assets 1,256 3,683
--------------------------------
Total current assets 63,821 256,098
Property and equipment, net 30,177 109,930
Note receivable - 46,964
Intangible assets, net - 171,261
Other assets 11,724 24,654
--------------------------------
$ 105,722 $ 608,907
================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 325,460 $ 505,865
Notes payable 278,145 110,667
Current portion of long-term debt - 89,250
--------------------------------
Total current liabilities 603,605 705,782
Long-term debt - 579,590
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 3,675,574 and
5,520,101 at September 30, 1996 and 1995, respectively
3,675 5,520
Additional paid-in capital 2,982,110 3,076,689
Accumulated deficit (3,483,668) (3,662,250)
Treasury stock, at cost; 794,527 shares at September 30, 1995
- (96,424)
--------------------------------
Total stockholders' equity (deficit) (497,883) (676,465)
--------------------------------
$ 105,722 $ 608,907
================================
</TABLE>
See accompanying notes.
14
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Entourage International, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995
--------------------------------
<S> <C> <C>
Net sales $1,179,262 $1,547,678
Cost of sales 202,825 284,989
--------------------------------
Gross profit 976,437 1,262,689
Expenses:
Selling, general and administrative 1,181,436 1,605,191
Depreciation 49,615 79,717
Amortization 7,185 19,957
--------------------------------
Total operating expenses 1,238,236 1,704,865
--------------------------------
Operating loss (261,799) (442,176)
Interest expense 36,245 36,681
--------------------------------
Loss from continuing operations before taxes and
extraordinary gain (298,044) (478,857)
Income tax expense - -
--------------------------------
Loss from continuing operations before extraordinary gain (298,044) (478,857)
Loss from discontinued operations, net of taxes (66,374) (239,527)
--------------------------------
Loss before extraordinary gain (364,418) (718,384)
Extraordinary gain on debt extinguishment, net of taxes 543,000 -
--------------------------------
Net income (loss) $ 178,582 $ (718,384)
================================
PER COMMON AND COMMON EQUIVALENT SHARE
Loss from continuing operations before extraordinary gain $ (.08) $ (.09)
================================
Extraordinary gain on debt extinguishment $ .14 $ -
================================
Net income (loss) $ .05 $ (.14)
================================
</TABLE>
See accompanying notes.
15
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Entourage International, Inc.
Statements of Stockholders' Equity (Deficit)
Years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Total
Common stock Additional Treasury stock stockholders
----------------------- paid-in Accumulated ---------------------- equity
Shares Amount capital (deficit) Shares Amount (deficit)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 4,770,101 $ 4,770 $3,032,439 $(2,943,866) (794,527) $(96,424) $ (3,081)
Issuance of common stock for
services rendered 750,000 750 44,250 - - - 45,000
Net loss - - - (718,384) - - (718,384)
-------------------------------------------------------------------------------------------------
Balance at September 30, 1995 5,520,101 5,520 3,076,689 (3,662,250) (794,527) (96,424) (676,465)
Shares acquired from
exchanging shareholders
(Note 2) - - - - (1,050,000) - -
Treasury shares retired (1,844,527) (1,845) (94,579) - 1,844,527 96,424 -
Net income - - - 178,582 - - 178,582
-------------------------------------------------------------------------------------------------
Balance at September 30, 1996 3,675,574 $ 3,675 $2,982,110 $(3,483,668) - $ - $(497,883)
=================================================================================================
</TABLE>
See accompanying notes.
16
<PAGE>
Entourage International, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended September 30
1996 1995
-----------------------------
Operating activities
<S> <C> <C>
Net income (loss) $ 178,582 $(718,384)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary gain on debt extinguishment (543,000) -
Depreciation and amortization 63,813 130,364
Loss on disposals of property and equipment - 81,802
Loss on settlement of lease obligations - 70,000
Common stock and notes issued in lieu of cash for
accrued expenses 72,269 45,000
Changes in operating assets and liabilities (net of the
effects of disposal of discontinued operations):
Trade accounts receivable (17,572) 86,240
Inventory (67,821) 186,970
Prepaid expenses and other (3,745) 24,795
Accounts payable and accrued liabilities 245,663 (92,539)
-----------------------------
Net cash used in operating activities (71,811) (185,752)
Investing activities
Purchases of property and equipment (12,210) (61,687)
Cash of discontinued operations (113,987) -
-----------------------------
Net cash used in investing activities (126,197) (61,687)
Financing activities
Proceeds from borrowing 201,123 399,507
Repayment of line of credit - (200,000)
Repayment of long-term debt (36,520) (20,000)
-----------------------------
Net cash provided by financing activities 164,603 179,507
-----------------------------
Net decrease in cash (33,405) (67,932)
Cash at beginning of year 33,405 101,337
-----------------------------
Cash at end of year $ - $ 33,405
=============================
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 36,245 $ 60,133
=============================
Supplemental disclosure of non cash transactions
Issuance of debt for acquisition of assets $ - $ 300,000
=============================
</TABLE>
See accompanying notes.
17
<PAGE>
1. Summary of Significant Accounting Policies
Description of the Company
Entourage International, Inc. (the Company) markets and distributes consumer
products (primarily skin care products) through retail stores which are Company-
owned or operated by franchisees in Texas, California, Colorado, Florida,
Georgia, Illinois, Nevada, Hawaii and Oklahoma.
Basis of Presentation
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company reported a loss
from continuing operations before extraordinary gain on debt extinguishment of
$298,044 for 1996 and has a deficiencies in working capital and stockholders'
equity of $539,784 and $497,883, respectively, at September 30, 1996.
The Company's continued existence is dependent upon its ability to achieve its
1997 operating plan, which contemplates significantly improved operating results
and cash flow and to obtain additional financing. Through September 1, 1997,
the Company received $292,500 in additional equity financing. In addition, in
January 1997, a note payable in the principal amount of $175,000 was canceled in
connection with a purchase business combination and liabilities totaling
approximately $63,000 were settled by issuance of common stock (Note 12).
If management cannot achieve the 1997 operating plan because of sales shortfalls
or other unfavorable events, the Company may find it necessary to further reduce
expenses or undertake other actions as may be appropriate.
Revenue Recognition and Concentration of Credit Risk
Sales to franchisees are recorded when products are shipped. Sales by Company-
owned retail stores are recorded when sold to a retail customer. Provisions are
made for estimated returns and allowances at the time of sale.
At September 30, 1996 and 1995, substantially all of the trade accounts
receivable were from Biogime Franchise Services, Inc. (BFS) (Notes 6, 8 and 12),
an affiliated company. Credit risk is considered by management to be minimal.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all short-
term investments with a maturity at date of purchase of three months or less to
be cash equivalents. At September 30, 1996 and 1995, there are no cash
equivalents.
18
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Inventory
Inventory consists mainly of skin care products which are stated at the lower of
cost or market using the first-in, first-out method. The Company purchases a
majority of its inventory from one vendor. These items are readily available
from other vendors. However, a change in supplier could cause delays in product
delivery and possible losses in revenue which could adversely affect operating
results.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which range
from three to five years.
Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Fair Value of Financial Instruments
The fair values of cash, trade accounts receivable, accounts payable and notes
payable approximate cost due to the short period of time to maturity.
Advertising
Advertising costs are expensed as incurred. Advertising costs amounted to
$147,206 and $160,506 in 1996 and 1995, respectively.
Income Taxes
The Company provides for income taxes under the liability method. Accordingly,
deferred tax assets and liabilities are computed for differences between the
financial statement carrying amounts and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts which are more likely than
not to be realized. The provision for taxes represents the tax payable or
refundable for the period plus or minus the charge during period in deferred
assets and liabilities.
19
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Per Share Amounts
Per share amounts are computed by dividing the applicable operating statement
caption amount by the weighted average number of common and dilutive common
equivalent shares outstanding during the respective periods. Common equivalent
shares consist primarily of stock options and have been excluded from the
computation of weighted average shares because their effect would be
antidilutive in each of the respective years. Weighted average shares
outstanding amounted to 3,908,588 in 1996 and 5,267,361 in 1995.
Stock Based Compensation
The Company grants to employees stock options for a fixed number of shares with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25) and, accordingly,
recognizes no compensation expense for the stock option grants. However, the
Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS No.
123).
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform to 1996 presentation.
2. Acquisitions, Dispositions and Other
In December 1994, the Company acquired from Petrolon (the Seller) certain assets
of a product line marketed using the name "Swipe" for $300,000 and received from
the seller, a working capital loan in the amount of $250,000. A convertible note
in the principal amount of $550,000 was issued in exchange for the product line
and working capital advance (Note 7). Entourage also granted the seller warrants
to purchase 10,000 shares of common stock for $.10 per share. The warrants were
canceled in December 1995.
On December 21, 1995, the Company transferred its 100% common interest in
Biogime International, Inc. (Biogime), a wholly owned subsidiary, to certain
shareholders of Entourage in exchange for 1,050,000 shares of Entourage common
stock. Biogime marketed skin care, health and nutritional products through
independent distributors. No gain or loss was recognized on the disposal.
Biogime's results of operations have been classified as discontinued operations
for all periods presented. Net revenues of the discontinued operations were
$315,602 and $987,232, in 1996 and 1995, respectively. Interest expense was
allocated to discontinued operations on the basis of pro rata revenues and
amounted to approximately $24,000 in 1995.
The Company closed one of its retail stores in September 1996. The closure
resulted in a charge of $27,000 for the write-off of leasehold improvements and
other assets, inventory, settlements of lease commitments, severance payments
and related legal fees. The net sales from this store was less than $67,000 in
1996 and less than $96,000 in 1995.
20
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated useful
September 30 lives
1996 1995 (in years)
-------------------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements $ 141,905 $ 199,851 3
Equipment 53,249 183,224 3
Software 28,188 81,651 5
-----------------------------------------
223,342 464,726
Accumulated depreciation (193,165) (354,796)
$ 30,177 $ 109,930
=========================================
</TABLE>
Property and equipment of $216,804 and related accumulated depreciation of
$174,794 was disposed with the discontinued operations (Note 2).
4. Intangible Assets
Intangibles assets consist of the following:
<TABLE>
<CAPTION>
September 30
1996 1995
----------------------------------------
<S> <C> <C>
Goodwill $ 13,785 $188,785
Covenant not-to-compete 45,000 45,000
----------------------------------------
58,785 233,785
Accumulated amortization (58,785) (62,524)
----------------------------------------
$ - $171,261
========================================
</TABLE>
Goodwill and the covenant not-to-compete were amortized using the straight line
method over 10 and 3 years, respectively. Goodwill of $175,000 and related
accumulation amortization of $17,501 was disposed with discontinued operations
(Note 2).
21
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
5. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30
1996 1995
--------------------------------------
<S> <C> <C>
Accounts payable $186,615 $351,311
Accrued commissions - 23,501
Accrued expenses 123,730 103,813
Other 15,115 27,240
--------------------------------------
Total $325,460 $505,865
======================================
</TABLE>
Accounts payable at September 30, 1996 includes outstanding checks in excess of
bank balances of $20,771.
6. Notes Payable
Notes payable consist of the following at September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
Subordinated note payable to Biogime Franchise Services Inc. (Notes 8 and
12), interest at 8%, collateralized by the Company's assets and due on
demand $200,876
Note payable to vendor, interest payable monthly from April 15 to September
15, 1996, principal and interest payable monthly from October 15, 1996
through March 15, 1997, collateralized by the Company's assets 55,000
Note payable to vendor 15,000
Other 7,269
-------------------
$278,145
===================
</TABLE>
Prior to 1996, the Company had a revolving credit agreement with a bank that
provided for borrowings of up to $200,000. Borrowings under the agreement, bore
interest at the bank's base rate plus 1-1/2%, were collateralized by the
Company's accounts receivable and inventory and were personally guaranteed by a
former officer of the Company. The line was repaid and terminated in March 1995.
Notes payable at September 30, 1995 represented promissory notes to various
lenders of which approximately $90,000 was assumed by Biogime in connection with
discontinued operations (Note 2). The remainder was paid in full during 1996.
22
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
7. Long-Term Debt
Long-term debt consisted of the following at September 30, 1995:
<TABLE>
<S> <C>
Note payable to vendor in monthly principal installments of $4,000, due
October 31, 1997, interest at 10% $118,840
Convertible note payable to Petrolon (Note 2), due in varying payments
through November 30, 1996, interest at 10%, convertible into Entourage
common stock at $.47 per share, collateralized by certain assets of the
Company 550,000
-------------------
668,840
Less current portion 89,250
-------------------
$579,590
===================
</TABLE>
The note payable to vendor was assumed by Biogime in connection with the
disposal of discontinued operations. The convertible note payable to Petrolon
was canceled in exchange for 300 shares of Biogime preferred stock (Note 2) and
resulted in an extraordinary gain on extinguishment of $543,000.
8. Related Party Transactions
The Company contracts with Biogime Franchise Services (BFS) (Notes 6 and 12), a
company owned by an officer/director of the Company to provide franchise
services. Certain agreements between the Company and BFS provide to BFS a sub-
license to use certain marks, software, other copyrighted materials and a
franchise information system in order to further develop the franchise program.
BFS purchases from the Company all product requirements for the franchise
locations, based on an agreed upon pricing schedule. In 1996 and 1995, sales to
BFS amounted to $214,000 and $292,000, respectively and trade accounts
receivable at September 30, 1996 and 1995 included $8,900 and $22,000
respectively due from BFS. The Company also contracted in 1996 with BFS for
certain advertising and promotional services which amounted to $47,331.
In 1995, sales to retail stores owned by a former shareholder/director/officer
of the Company amounted to $15,000 and trade accounts receivable at September
30, 1995 includes $19,000 due from such stores. In addition, at September 30,
1995, the Company had a note receivable and accrued interest totaling $30,800
due from the former shareholder/director/officer. In connection with the
resignation of the former shareholder/ director/officer, in November 1994, the
Company agreed to a continuance of his compensation at the rate of $7,000 per
month through September 30, 1995.
23
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
9. Income Taxes
Following is a reconciliation of federal income taxes computed at the statutory
rate of 34% to income tax expense as reported.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C>
Expected income tax benefit at 34% $(101,300) $(162,800)
Net operating loss recognized on extraordinary gain 184,600
Net benefit attributable to discontinued operations (2,100) (81,400)
Change in valuation allowance (81,200) 244,200
---------------------------------------
Income tax expense $ - $ -
=======================================
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
September 30
1996 1995
-----------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 1,160,400 $ 1,207,000
Depreciation and amortization 16,200 46,400
Covenant not to compete 12,600 11,200
Accruals 5,600 5,600
Other, net 3,600 9,400
-----------------------------------------
1,198,400 1,279,600
Less valuation allowance (1,198,400) (1,279,600)
-----------------------------------------
Net deferred taxes $ - $ -
=========================================
</TABLE>
Based on numerous factors, including but not limited to the Company's historical
losses, management believes that it cannot currently demonstrate that it is more
likely than not that it will fully realize all of the benefits of deferred tax
assets existing at September 30, 1996. Accordingly, a valuation allowance has
been provided for the full amount of the Company's deferred tax assets.
At September 30, 1996, the Company had a federal net operating loss carryforward
of approximately $3,400,000. If not used to offset future income, these loss
carryforwards will expire between 2002 and 2011. Pursuant to the Tax Reform Act
of 1986, use of the Company's net operating loss carryforwards may be
substantially limited if a cumulative change in ownership of more than 50%
occurs within a prescribed testing period. Equity transactions in 1996 and 1997
(Note 12) may have resulted in such a change and would likely result in a
limitation of the amount of net operating loss that may be used annually.
Further, the limitation may render a substantial portion of the Company's net
operating loss carryforward unusable.
24
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
10. Stock Option Plans
The Company has a qualified Incentive Stock Option Plan (the Plan) under which
it may grant options to purchase up to 105,000 shares of common stock on a
discretionary basis to key employees, including officers and directors.
The exercise price of options granted under the ISOP may not be less than 100%
of the fair market value of the underlying shares of common stock on the day the
option is granted, except that, with respect to options granted to persons
owning more than 10% of the common stock of Entourage, the option price must be
at least 110% of the fair market value of the common stock on the date of grant.
All options must be exercised within ten years of the date of grant, except
that, with respect to options granted to persons owning more than 10% of the
stock of Entourage, the options must be exercised within five years of the date
of grant.
Options to purchase 46,000 shares of common stock for $.20 per share were
granted under the Plan in January 1995 and were canceled in November 1996.
Options outstanding at September 30, 1996 had a remaining contractual life of
approximately eight years. At September 30, 1996, there were no options
available for grant under the Plan.
The Company also has a Non-qualified Stock Option Plan (the Non-qualified Plan)
under which 50,000 shares of common stock are reserved for issuance to key
distributors. Options granted under the Non-qualified Plan are nontransferable
and expire if not exercised within ten years of the date of grant. There were no
options outstanding under the Non-qualified Plan at September 30, 1996 and 1995.
No options were granted, exercised or canceled under the Non-qualified Plan in
1996 and 1995. At September 30, 1996 and 1995, there were 30,000 options
available for grant under the Non-qualified Plan.
Under certain arrangements with former directors and officers of the Company
certain non plan options to purchase an aggregate of 350,000 shares of common
stock at per share exercise prices ranging from $.20 to $.53 (weighted average
exercise price per share of $.25) were outstanding at September 30, 1995. These
options were canceled in December 1995.
Pro forma disclosures as required by SFAS No. 123 have not been presented
because of the immaterial amount of pro forma compensation attributable to stock
options granted during the periods presented.
11. Commitments and Contingencies
Lease Obligations
During 1995, the Company leased office and warehouse space in Houston, Texas.
The Houston lease was terminated in January 1996 in connection with the
discontinued operations (Note 2). During 1996, the Company leased office and
warehouse space in San Juan Capistrano, California, and leased retail space in
each city in which it has a retail store. Rent expense in 1996 and 1995 was
approximately $193,000 and $220,000, respectively, and future commitments are
approximately $100,000, $27,000 and $2,000 in 1997, 1998 and 1999, respectively.
25
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
Litigation
The Company was sued on June 14, 1996, by Biogime International, Inc. (Note 2)
for damages related to alleged breaches of the master transaction agreement and
the standstill agreement signed in December 1995. On November 20, 1996, a
settlement was reached and the Company paid Biogime $20,000.
The Company is subject to other claims arising from normal business operations.
Management believes that losses arising from these claims, if any, will not have
a material adverse effect on the Company's financial position or results of
operations.
Employee Benefits
The Company has a group medical plan which provides medical and hospital
benefits and term life insurance to its employees, including officers. This
coverage is provided at no cost to the employee, and the Company partially pays
the dependent coverage. The cost of group medical was approximately $30,500 and
$42,000 in 1996 and 1995, respectively.
12. Subsequent Events
On January 31, 1997 the Company, through a wholly owned subsidiary BFS
Acquisition Corp. (BAC), entered into an agreement and plan of merger with the
shareholders of Biogime Franchise Services USA, Inc. (BFS) (Notes 6 and 9)
whereby BFS was merged into BAC.
As a result of the merger, BAC acquired all of the assets of BFS amounting to
$362,452 and assumed all of the liabilities of BFS amounting to $184,701. The
assets included a $175,000 promissory note payable by the Company to BFS which
was due on demand. Following the merger, this indebtedness was canceled. The
merger consolidation consisted of 7,500,000 shares of common stock issued to the
shareholders of BFS.
The value of the merger consideration, as determined by reference to recent
trading prices and quotations for the Company's common stock, was approximately
$300,000, which represented the business judgment of the Company's Board of
Directors as to the fair value of BFS.
The merger will be accounted for as a purchase and, accordingly, the operations
of BFS will be included in the consolidated statement of operations beginning
February 1, 1997. Goodwill arising from the transaction of approximately
$122,000 will be amortized on a straight-line basis over ten years.
26
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued)
12. Subsequent Events (continued)
Supplemental unaudited pro forma information giving effect to the BFS merger is
as follows:
<TABLE>
<CAPTION>
Year ended
September 30, 1996
---------------------------
<S> <C>
Net revenues $1,345,525
Loss from continuing operations (222,048)
Net income 242,525
Per share amounts:
Loss from continuing operations $ (.02)
Net income $ .02
</TABLE>
On January 30, 1997, the Company issued a total of 2,867,500 shares of common
stock as follows: 375,000 shares were issued in lieu of a cash payment for
unpaid director fees totaling $15,000 accrued from December 31, 1995 to November
30, 1996; 348,750 shares were issued in lieu of a cash payment to a director,
for unpaid financial consulting services totaling $14,000 accrued from April
1995 through November 1996; 1,143,750 shares were issued in lieu of a cash
payment to Iamco Financial Corp., a company owned by a director, for unpaid
corporate consulting and advisory services totaling $45,750 accrued from April
1995 through November 1996; 1,000,000 shares were awarded an officer/director as
a bonus for the accomplishment of specific activities.
On September 1, 1997, the Company obtained a $50,000 line of credit with a bank,
which bares an interest rate at prime plus 2-1/2 percent and matures September
1, 1998. The line of credit is secured by the Company's assets and guaranteed by
a shareholder.
13. Fourth Quarter Adjustments
Adjustments were made in the fourth quarter of 1996 to accrue expenses totaling
$69,000 and to recognize the extraordinary gain on debt extinguishment of
$543,000 (Note 7).
27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On June 11, 1997, KPMG Peat Marwick, LLP, previously the principal
accountant for the Company, was dismissed and on June 16, 1997, Ernst &
Young was engaged as principal accountants. The decision to change
accountants was approved by the Board of Directors.
In connection with the audits of the two fiscal years ended September, 30,
1995, and the subsequent interim period through June 11, 1997, there were no
disagreements with KPMG Peat Marwick, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to
the subject matter of the disagreement.
KPMG Peat Marwick LLP's auditors' report on the financial statements of the
Company indicated that there is uncertainty about the Company's ability to
continue as a going concern. See the auditors' report on the fiscal year
ended September 30, 1995 included herein.
28
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
Director
Name Age Position Since
---- --- -------- --------
<S> <C> <C> <C>
John C. Riemann......... 56 Chairman 1991
Warren L. Hernand....... 60 Director 1995
Stan R. Wylie........... 54 Director 1995
Paul A. Reyff Sr........ 67 Director 1995
Alan Goldsberry......... 44 Director 1995
</TABLE>
John C. Riemann has been a director of Entourage since June of 1991, and was
- ---------------
Executive Vice President of Entourage from October 1991 to May 1994. In December
1995, he was elected Chairman, CEO and President of the Company. Mr. Riemann is
President and founder of Biogime Franchise Services, Inc., a company formed in
1994. Mr. Riemann was president of J.C.R. Enterprises which included two
Biogime franchise retail locations from 1987 to 1996.
Warren L. Hernand was a director of Entourage from 1991-1993, and has been a
- -----------------
director since 1995. He is currently a financial consultant for IAMCO Financial
Corporation, a financial services company that he has owned since 1982.
Stan R. Wylie has been a director of Entourage since December 1995. Since March
- -------------
1995 he has been a self employed financial consultant. Mr. Wylie was employed
from 1992 to 1995 by several related technology companies located in Houston and
Dallas areas. Mr. Wylie was Chief Financial Officer of Entourage from 1986 to
1991.
Paul A. Reyff Sr. has been a director of Entourage since August 1996. Mr. Reyff
- -----------------
is a retired Navy captain currently employed by the Office of the Secretary of
Defense as a Business and Industry Specialist. He has been Chief Executive
Officer of New England Investment Company 1979-1994.
Alan Goldsberry has been a director of Entourage since December 1995. Mr.
- ---------------
Goldsberry is the founder of Allied Waste Industries, Inc. a NASDAQ listed
company. After resigning in 1992, Mr. Goldsberry pursued a variety of business
ventures and currently advises executive management teams of fast growth
companies. Mr. Goldsberry is president of a recently formed investment company
for identifying and acquiring stock in emerging public companies.
29
<PAGE>
Board of Directors Meetings and Compensation
- --------------------------------------------
During the fiscal year ended September 30, 1996, the Board of Directors
held five meetings. All Board members attended all meetings held, either in
person or by telephone except for one at which Mr. Goldsberry was not present.
The Directors also took actions by unanimous consent on 3 occasions.
The Company paid each of its Directors - directors fees of $3,000 for the
fiscal year ending September 30, 1996. In lieu of cash payments, the Directors
agreed to an issuance of 75,000 shares of the Company stock valued at $.04 per
share.
Nominating Committee - this committee recommends candidates for the Board of
- --------------------
Directors and is comprised of Mr. Riemann and Mr. Hernand.
Acquisition Committee - this committee evaluates acquisition proposals and
- ----------------------
makes recommendations to the Board of Directors. The Acquisition Committee is
comprised of Mr. Riemann, Mr. Hernand and Mr. Wylie.
30
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Cash and Cash Equivalent Compensation
The following table and notes thereto set forth the aggregate of all cash
and cash equivalent compensation paid with respect to each of the two fiscal
years ended September 30, 1996 to each of the three most highly compensated
officers:
<TABLE>
<CAPTION>
ALL OTHER
PRINCIPAL COMPEN-
NAME POSITION(S) YEAR SALARY BONUS SATION **
- ---- ----------- ---- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
John C. Riemann President/CEO 1996 $ 74,997 $ 0 $ 43,000
(since December 1995)
Julie Martin President/CEO 1996 $ 22,500 $ 0 $ 0
(until December 1995)
1995 $ 90,000 $ 0 $ 0
W. John Southwell President/CEO 1995 $ 84,000 $ 0 $ 0
(until November 1994)
</TABLE>
** Includes fees to directors accrued but not paid as of September 30, 1996.
On January 30, 1997, CEO John Riemann was awarded 1,000,000 shares of the
Company's common stock, valued at $.04 per share, for restructuring
accomplishments during the period April 1995 through November 1996.
On February 1, 1995, CEO Julie Martin was awarded 150,000 shares valued at .06
per share. 50,000 shares were vested on February 1, 1995 and 100,000 shares
were vested on June 30, 1995. Ms. Martin was awarded an option to acquire an
additional 150,000 shares at .20 per share over the next two years. Effective
with the December 21, 1995, transfer of the direct sales division and
resignation of Ms. Martin, all options were canceled and previously awarded
shares were exchanged.
Compensation Arrangements
Mr. Riemann's annual salary as Chairman, CEO and President of the Company
is $100,000. The Company has no employment agreement with Mr. Riemann.
Entourage has a group medical plan which provides medical and hospital
benefits and term life insurance to its employees, including its officers. This
coverage is provided at no cost to the employee and Entourage partially pays the
dependent coverage.
31
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders
The table set forth below contains certain information, as of September 30,
1996, regarding beneficial ownership of the Common Stock by each person who is
known by Entourage to own beneficially more than 5% of its Common Stock:
<TABLE>
<CAPTION>
Number of Number of Total Number Percent of
Name and Address Shares Other Shares of Total Shares Class
of Beneficial Owned of Owned Owned Beneficially
Owner Record Beneficially Beneficially(a) Owned
- ------------------- --------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
John C. Riemann 505,000 0 505,000 13.7%
c/o Entourage International Inc.
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
W.O. Menefee 354,280 0 354,280 9.6%
PO Box 85
Montgomery, TX 77356
Donald L. Shriver 311,027 0 311,027 8.5%
Rt. 2, Box 50 B
Richmond, TX 77469
W. John Southwell 300,000 0 300,000 8.2%
(address unknown)
</TABLE>
(a) Unless otherwise indicated, all securities listed in this table are owned
beneficially and of record by the persons indicated, who possess sole
voting and investment powers as to such securities, subject to community
property laws where applicable. The data concerning beneficial ownership
is based upon information furnished by the persons named above (unless the
person has not responded to requests for information) and contained in the
Company's records.
32
<PAGE>
Security Ownership of Management
The table set forth below contains certain information, as of September 30,
1996, regarding beneficial ownership of equity securities of Entourage by each
of the Directors and Executive Officers and by all of the Directors and
Executive Officers as a group:
<TABLE>
<CAPTION>
Number of
Shares Approx.
Name of Title Beneficially Percent
Beneficial Owner of Class Owned(a) of Class
- ---------------------------------------- ---------- ------------- ---------
<S> <C> <C> <C>
John C. Riemann, Director/CEO Common 505,000 13.7%
c/o Entourage International Inc.
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Warren L. Hernand, Director Common 50,000 1.4%
33 Baypoint Village Dr.
San Rafael, CA 94901
Stan R. Wylie, Director Common 57,281 1.6%
15306 Quiet Creek.
Houston, TX 77095
Paul A. Reyff Sr., Director Common 165,000(b) 4.5%
36 Cove Court
Napa, CA 94559
Alan Goldsberry, Director Common 32,550 1.0%
3245 Able Court
Murrietta, GA 30062
Directors, and Common 809,831 22.2%
Executive Officers as a Group (5 persons)
</TABLE>
(a) Unless otherwise indicated, all securities in the table are owned
beneficially and of record by the persons indicated, who possess sole
voting and investment powers as to such securities, subject to community
property laws where applicable. The data concerning beneficial ownership
is based upon information furnished by the persons named above and
contained in Entourage's records.
(b) Includes 85,000 shares held by New England Investment Co., Inc.
33
<PAGE>
Stock Transactions Involving Management
None of the directors was, during the past year, a party to any contract,
arrangement or understanding with any person with respect to any securities of
Entourage, including but not limited to, joint ventures, loan or option
arrangements, puts or calls, guarantees against loss or guarantees of profit,
division of losses or profits, or the giving or withholding of proxies, other
than described herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended September 30, 1996, the following were the
only transactions or series of transactions with Entourage in which the amount
involved exceeded $60,000, and in which any of directors Davis, Riemann,
Whitworth, Goodman, Martin, Hernand, Wylie, Reyff, Goldsberry or former director
Southwell or members of their immediate families, had a direct or indirect
material interest (and any proposed transactions of a similar type):
Previous Directors Davis, Whitworth, Goodman and Martin These Directors
- -------------------------------------------------------
exchanged all Entourage common stock held by them in the December 21, 1995,
asset and liabilities transfer of the direct sales division. After this
transaction, these individuals held no common shares or options for common
stock.
Mr. Riemann. The Company contracted with BFS, a company owned by John Riemann,
- ------------
effective May 2, 1994 to provide all franchise services formerly conducted by
the Company through its franchise division. In the fiscal year ended September
30, 1996, the Company sold approximately $214,000 of products to BFS, and has a
trade receivable of $8,900 as of September 30, 1996. In December 1995, BFS
agreed to provide up to $175,000 in working capital loans to the Company to
finance restructuring activities associated with the December 21, 1995, asset
and liabilities transfer of the direct sales division. In December 1995, Mr.
Riemann was elected Chairman, CEO and President of the Company.
Mr. Reyff Mr. Reyff, a director, is a shareholder in BFS.
- ---------
34
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents required by Item 601 of
Regulation S-B are filed as exhibits to this report.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Articles of Incorporation of Entourage International, Inc. and amendments thereto (incorporated by reference to
Exhibit No. 3.1 to Amendment No l to Registrant's Registration Statement of Form S-18, filed January 16, 1986,
File No. 2-99726-FW).
3.2 Bylaws of Entourage International, Inc. incorporated by reference to Exhibit No. 3.2 of Registrant's
Registration Statement on Form S-18, filed August 16, 1985, File No. 2-99726-FW.
4.1 Specimen Common Stock Certificate of Entourage International, Inc., incorporated by reference to Exhibit
No. 4.01 of Registrant's Annual Report on Form 10-K for the year ended September 30, 1989, File No. 1-9206.
10.1 Amended Qualified Incentive Stock Option Plan for Entourage International, Inc. incorporated by reference to
Exhibit No. 10.26 of the registrant's Annual report of Form 10-K for the year ended September 1992, File
No. 1-9206.
10.2 Amended Qualified Stock Option Plan for Entourage International, Inc. incorporated by reference to Exhibit
No. 10-26 of the registrant's Annual report of Form 10-K for the year ended 1992, File No. 1-9206.
10.3 Amended Non-qualified Stock Option Plan for Entourage International, Inc., incorporated by reference to Exhibit
No. 10-27 of the Registrant's Annual Report on Form 10-K or the year ended September 1992, File No. 1-9206.
10.4 License Agreement between Entourage International, Inc. and Biogime Franchise Services (USA), Inc. dated
May 2, 1994.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.5 Biogime Products Supply and Distribution Agreement between Entourage International, Inc. and Biogime Franchise
Services (USA), Inc. dated May 2, 1994.
10.6 Assignment and Assumption Agreement between Entourage International, Inc. and Biogime Franchise Services (USA),
Inc. dated May 2, 1994.
10.7 Services Agreement between Entourage International, Inc. and Gage Research & Development Institute, Inc. dated
July 12, 1994.
10.8 Settlement and Release Agreement between Entourage International, Inc. and John Southwell dated
November 1, 1994.
10.9 Asset Purchase Agreement between Entourage International, Inc. and Diamond Falcon Corporation dated
December 29, 1994.
10.10 Master Transaction Agreement incorporated by reference to form 8-K filed on January 4, 1996.
21.1 Subsidiary of Registrant
23.1 Consent of experts letter from KPMG Peat Marwick dated November 22, 1995.
27 Financial Data Schedule
</TABLE>
36
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
ENTOURAGE INTERNATIONAL, INC.
By: /s/ JOHN C. RIEMANN
-------------------
John C. Riemann, Chief Executive Officer
Date: October 15, 1997
----------------
By: /s/ JOHN C. RIEMANN
-------------------
John C. Riemann
Director
Date: October 15, 1997
----------------
By: /s/ PAUL A. REYFF SR.
---------------------
Paul A. Reyff, Sr.
Director
Date: October 15, 1997
----------------
By: /s/ WARREN L. HERNAND
---------------------
Warren L. Hernand
Director
Date: October 15, 1997
----------------
By: /s/ ALAN GOLDSBERRY
-------------------
Alan Goldsberry
Director
Date: October 15, 1997
----------------
By: /s/ STAN W. WYLEY
-----------------
Stan W. Wyley
Director
Date: October 15, 1997
----------------
37
<PAGE>
EXHIBIT 23.1
Independent Auditors' Report
- ----------------------------
The Board of Directors and Shareholders
Entourage International, Inc.:
We have audited the accompanying balance sheet of Entourage International, Inc.
(the Company) as of September 30, 1995 and the related statements of operations,
stockholders' equity and cash flow for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entourage International, Inc.
as of September 30, 1995 and the results of its operations and cash flows for
the year ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to financial
statements, the Company has suffered losses and has a net capital deficiency
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
Houston, Texas
November 22, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 11,080
<ALLOWANCES> 0
<INVENTORY> 51,485
<CURRENT-ASSETS> 63,821
<PP&E> 282,127
<DEPRECIATION> 251,950
<TOTAL-ASSETS> 105,722
<CURRENT-LIABILITIES> 603,605
<BONDS> 0
0
0
<COMMON> 3,675
<OTHER-SE> (501,558)
<TOTAL-LIABILITY-AND-EQUITY> 105,722
<SALES> 1,179,262
<TOTAL-REVENUES> 1,179,262
<CGS> 202,825
<TOTAL-COSTS> 1,384,261
<OTHER-EXPENSES> 56,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,245
<INCOME-PRETAX> (298,044)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (66,374)
<EXTRAORDINARY> 543,000
<CHANGES> 0
<NET-INCOME> 178,582
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
