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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, 1995
OR
Commission file number 1-9206
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ENTOURAGE INTERNATIONAL, INC.
(exact name of registrant as specified in its charter)
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Texas 76-0118305
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
32240 Paseo Adelanto Ste A
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San Juan Capistrano CA 92675
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(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code (714) 488-2184
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Securities registered pursuant to Section 12 (b) of the Act:
Common Stock. $.001 par value
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(Title of Class)
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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 X No
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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 sales for its most recent fiscal year were $2,534,910.
As of September 30, 1995, the aggregate market value of the issuer's common
stock, $.001 par value, held by nonaffiliates of the issuer, is $189,023
computed based upon bid and ask quotes averaging $.04 per share. No active
trading market exists.
As of December 15, 1995, there were 4,725,574 shares outstanding of the
issuer's common stock, $.001 par value.
1
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TABLE OF CONTENTS
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PART I
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Item 1 Description of Business............................................... 3-11
Item 2 Description of Property............................................... 11
Item 3 Legal Proceedings..................................................... 12
Item 4 Submission of Matters to a Vote of Security Holders................... 12
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.............. 13
Item 6 Management's Discussion and Analysis of Financial
Conditions and Results of Operations.................................. 14-20
Item 7 Financial Statements.................................................. 21-40
Item 8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure................................ 41
PART III Items 9 through 12 (incorporated by reference)
Item 9 Current Directors and Executive Officers.............................. 41
Item 10 Executive Compensation................................................ 42-43
Item 11 Security Ownership of Certain Beneficial Owners and Management........ 44-48
Item 12 Certain Relationships and Related Transactions........................ 48-49
Item 13 Exhibits and Reports on Form 8-K...................................... 50-51
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2
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
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Entourage International, Inc. ("Entourage" or "the Company") is a Texas
corporation which commenced operations in 1984. In 1987, Entourage acquired
from Scientia Corporation ("Scientia"), a related party until March 1991,
all of the assets and operations, but none of the liabilities, of
Scientia's Biogime division, which marketed, through a network of
independent distributors, a line of skin care and health care products,
including the Metrin skin care systems.
The Company markets and distributes consumer products through a network
of independent distributors and 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, licensed or franchised retail stores and through
arrangements with independent distributors, and internationally through
licensees.
The Company currently markets and distributes Biogime skin care
products and health and nutritional products. In recent years, the
Company's most significant operations have involved the sale of skin care
products.
Business of Issuer
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A. PRODUCTS
The company markets Biogime skin care products, and health and
nutritional care products.
Biogime Skin Care Products: The Company's primary products are a series
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of skin care formulations marketed and sold using the name Biogime. Sales
in the Biogime product line consist mainly of the sale 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 can be used during the
fifteen month License Agreement following the December 21, 1995 asset,
liability and obligation transfer of the direct sales division, after which
the name "biozhem" will be used by Entourage. (See notes to financial
statements)
Health and Nutritional Care Products: In 1991 the Company introduced a
------------------------------------
line of health and nutritional care products. These products are carried
under the NutriSense product line and include a line of vitamins and
supplements which were first marketed in 1982. These products are sold
through company-owned retail stores, licensed or franchised retail stores
and independent distributors. Sales of health and nutritional care products
comprised less than 5 % of the Company's total sales in each of the last
three years. These products will be dropped from the line with the December
21, 1995 asset, liability and obligation transfer of the direct sales
division.
3
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DISTRIBUTION
Biogime skin care products are marketed through six Company-owned
retail stores, eight licensed and franchised retail stores, a network of
independent distributors and eleven licensees outside the United States as
of September 30, 1995.
Company-owned Retail Stores
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During fiscal 1995, the Company operated nine Company-owned retail
stores under the name Biogime Skin Care Center, including three opened
during 1994, and closed in 1995. Sales through Company-owned retail stores
were 50%, 58%, 41% of total sales in the fiscal years ended September 30,
1995, 1994, and 1993 respectively. The locations and opening dates (during
the current and previous fiscal years) of the Company-owned and operated
Retail Stores as of September 30, 1995 were:
Dallas, Texas
Phoenix, Arizona
San Jose, California (March 1993)
Denver, Colorado (March 1993)
Tampa, Florida (April 1993)
Chicago (Oakbrook),
Illinois (September 1993)
Baltimore (Lutherville), Maryland (February 1994) (Closed 3/95)
Detroit (Birmingham), Michigan (March 1994) (Closed 1/95)
Philadelphia (Bryn Mawr), Pennsylvania (May 1994) (Closed 2/95)
The San Jose store was acquired from a franchisee; other stores were
opened by the Company. In order to improve its profitability, the Company
consolidated the retail stores in the Denver, Colorado and Tampa/
Clearwater, Florida markets where the Company had two centers each. The
Clearwater store closed in November 1993 and the second Denver store closed
in December 1993.
Management evaluated the profitability of all its retail stores and
closed unprofitable stores in Baltimore, Detroit and Philadelphia in
January, February and March 1995. These stores have shown losses since
their opening, and management has 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 Biogime retail stores which describe the
Biogime skin care products. Management continues to evaluate the
effectiveness of the "Infomercials" as a sole advertising medium or as part
of an advertising campaign using multiple media. Entourage may or may not
continue to use the "Infomercial" as its sole or primary method of
attracting customers to retail stores.
4
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Franchised and Licensed Retail Stores
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The Company contracted with Biogime Franchise Services USA, Inc.
("BFS"), a newly-formed company owned by John Riemann, effective May 2,
1994 to provide all franchise services formerly conducted by the Company
through its franchise division. Mr. Riemann was Executive Vice President of
the Company responsible for the franchise division, and terminated his
employment with the Company effective May 2, 1994, but remains a director
of the Company. The license agreement, supply and distribution agreement
and related agreements between the Company and BFS provide BFS a sub-
license to use certain marks, software, other copyrighted materials and the
Biogime franchise system in order to further develop a franchise program
for the Biogime Skincare Centers.
BFS was granted the exclusive right to provide the Biogime product and
required franchise services to existing franchise locations, and to offer
and sell Biogime franchise rights in additional specified areas in the
United States. Additionally, BFS was granted the right to offer, sell and
service franchises subject to a right of first refusal arrangement with the
Company to open a company-owned retail store in other specified areas of
the United States.
The agreements are perpetual; the supply and distribution agreement may
be terminated if certain minimum purchase levels are not reached by BFS,
which would then cause cancellation of the license agreement.
BFS will purchase from the Company all the Biogime product requirements
of existing and future Biogime franchise locations, based on an agreed upon
pricing schedule, which is adjustable as supplier prices change.
Management expects these agreements to result in increased
profitability due to the reduction in expenses related to personnel in the
franchise division, the addition of new franchise locations and increased
sales to franchise retail locations. Reduced prices to BFS have resulted
(since May 2, 1994) and will continue to result in decreased sales, which
are offset by reduced costs at the previous volume of product sales in the
franchise division. For the period May 2, 1994 through September 30, 1995,
the decreased sales, cost of sales, and operating expenses related to the
BFS agreement have had no significant effect on profitability.
Biogime products were distributed through eight franchised retail
stores under the Biogime Skin Care Center name through May 2, 1994. These
Centers continue to operate using the same name; however, their operations
have been the responsibility of BFS since May 2, 1994. These franchised
retail stores are located in California, Oklahoma, Hawaii, Georgia, and
Nevada.
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The continued operation of specific franchise locations and the
addition of new locations are the responsibility of BFS with the support of
the Company. There are no targeted new franchise locations in the immediate
future. Although BFS may sell additional franchises, BFS and the company
intend to concentrate on increased sales and profitability of the existing
franchise locations.
Entourage, and, since May 2, 1994, BFS has filed Franchise Offering
Circulars as required by the State of California. The Company has developed
an offering circular as required by the Federal Trade Commission for other
states.
Sales to franchised and licensed retail stores (through May 2, 1994)
and sales to BFS (from May 2, 1994 through September 30, 1995) were 12%,
15%, and 24% of total sales for the fiscal years ended September 30, 1995,
1994 and 1993 respectively.
On September 13, 1995 a forbearance and amendment agreement was reached
by the Company and BFS whereby the minimum monthly purchase requirements in
the original BFS agreement were waived and a new minimum monthly purchase
requirement was established. BFS has achieved the amended monthly purchase
requirement for September 30, 1995.
Entourage makes available to its franchised and licensed Retail Stores
the 30-minute "Infomercial" television programs that describe the Biogime
skin care products. These programs are currently being used in most of the
areas serviced by franchised and licensed Biogime retail stores.
(3) Direct Sales Through Independent Distributor Network
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Biogime products are purchased from the Company by independent
distributors for resale to their customers and for resale to persons they
have recruited and trained, if any (their "downline distributors"). As of
September 30, 1995, Entourage had approximately 1,300 distributors selling
Biogime products. These distributors are not employees of Entourage. Direct
sales through the independent distributor network were 35%, 23% and 30% of
total sales for the fiscal years ended September 30, 1995, 1994, and 1993
respectively.
The Company's current compensation plan for distributors was changed to
reflect the advice given by Randy Gage, a direct sales consultant. There
are several levels of discounts on product cost, and bonuses for
performance and recruitment by the distributor and its "downline". As of
September 30, 1995 this restructuring has not had a significant effect on
the direct marketing division.
Biogime products are purchased by distributors at discounts which vary
depending on their level within the Biogime network. No sales organization
of any single Consultant, Senior Consultant or Executive Director has
accounted for ten percent (10%) or more of the Company's total sales during
any of this three most recent fiscal years.
6
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Distributors are encouraged to attend training programs sponsored by
the Company and to use the knowledge gained to build and maintain their
downline organizations. Such programs and seminars typically emphasize
product knowledge and sales and recruiting techniques. Entourage makes
available for sale to its distributors product literature, sales aids and
other materials to assist distributors in building and maintaining sales
organizations. In addition, Entourage periodically conducts sales and
product training seminars and provides awards and incentives for
distributors who meet special qualification requirements established by
Entourage.
The Company executed a services agreement with Randy Gage on July 12,
1994 to assist the Company with its direct marketing program. Under terms
of the contract, Gage was to provide development and marketing services to
facilitate an improved direct marketing program for the Company, including
development of a compensation plan, software system, and supplement
marketing and selling materials.
The compensation expense recognized for these activities was $10,000
cash, 30,000 shares of unregistered common stock, a monthly retainer of
$2,500 per month, and cash and stock option bonuses based on target profit
contributions for the direct marketing division. The minimum profit
contribution of the direct marketing division which would cause a bonus to
be paid is $710,000 for the eighteen month period beginning August 1, 1994.
The profit contribution for the relevant period through September 30, 1995
was $77,976. Any obligations under the contract were transferred to Biogime
on December 20, 1995.
(4) International Export Operations
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The Company has licensees in Sweden, Guatemala, New Zealand, Korea,
Norway, Denmark, Malaysia/Singapore, Hong Kong, Spain, El Salvador,
Thailand and Mexico. The Company considers international licensee
opportunities as long-term and devotes few of its resources to this
division currently. However, sales have been less than 5% of total sales in
the fiscal years ended September 30, 1995, 1994 and 1993 respectively, and
have provided modest profit contributions to the Company.
In December 1991 the Company contracted with IAMCO, a company
owned by Mr. Hernand, a former director, to be responsible for export
sales. The contract with IAMCO specified certain sales goals which were not
met, and the Company canceled the contract in 1993. No financial effect on
the Company resulted from the cancellation of the contract.
7
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COMPETITION
Consumer marketing, wholesale and retail distribution businesses are highly
competitive. Entourage competes with a large number of companies and
product lines in virtually all 50 states in which its products are sold.
Competition is particularly intense in the sale of skin care, cosmetics and
nutritional products. In addition, in recent years competition for
distributors in general has grown increasingly intense. Many of these
competitive companies are well established and have research, financial and
manufacturing capabilities and other resources substantially greater than
those of Entourage. Companies with more established sales management teams
such as Amway Corporation, Mary Kay Cosmetics, Inc. and Avon Products, Inc.
are in direct competition with the Company for recruitment of sales forces
and sales of skin care products to consumers.
The Company believes that two of the principal competitive factors in its
industry are the strength of a competitor's sales force and the quality of
its products. Entourage has developed extensive training materials,
including seminars, videotape instructions and written materials, in order
to acquaint distributors 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 distributors
therefore focus on the sale of fewer types of products or product lines. As
a result, the Company believes its distributors have a greater knowledge
and understanding of the Company's products which permits a more thorough
and effective sales presentation from the distributor to the customer.
SUPPLIERS
The Company has agreements with Arizona Natural Resources, Inc. ("ANR"),
and ASG Worldwide Sales, Inc. ("ASG") ("the suppliers"), whereby Entourage
acquired rights to the series of skin care formulations known as Biogime.
Under the agreement with ANR, the supplier 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 the suppliers an amount per bottle
ordered, as stipulated in the agreements, and all shipping and delivery
costs. The agreements do not contain provisions which would require the
company to purchase minimum volumes thereunder. These agreements are
currently contracted on a month-to-month basis.
8
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The Company also has agreements with ASG, whereby ASG is committed to
supervise the manufacture (including, without limitation, the bottling and
packaging) of the health and nutritional products, and produce and deliver
to the Company the full requirements of the Company with respect to those
products. Entourage is required to pay ASG an amount per bottle ordered, as
stipulated in the agreements, and all shipping and delivery costs. The
agreements do not contain provisions which would require the Company to
purchase minimum volumes thereunder.
The Company maintains its inventory at a fulfillment warehouse in
Rosenburg, Texas. 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 a significant supplier. The majority of the inventory is sold for
cash. Merchandise is shipped directly from the Rosenburg, Texas warehouse
to distributors. The Company also ships to one service center in California
for delivery to distributors.
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. Distributors
and franchises are required to provide a 90-day money back guarantee to all
customers who purchase products from them, and the Company provides
replacement merchandise to distributors and franchises based on this
guarantee.
E. PATENTS, TRADEMARKS AND COPYRIGHTS
The Company utilizes no patents or copyrights in connection with
any of its operations. The Company has trademark registrations for
"Biogime", "Biogime Skin Care Center" and "Entourage" in the United States.
The Company has also been granted trademark registration for the "Biogime"
name in Australia, Canada, Denmark, Korea, Norway, Sweden and Thailand.
The Company has filed applications to register the trademark "Biogime" in
Malaysia, Singapore, New Zealand, China and Mexico, and the "NutriSense"
name in the United States, Malaysia and Mexico. The Company seeks to
protect its proprietary interests in its products by applying for patents,
trademarks and/or copyrights as circumstances warrant.
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F. GOVERNMENT REGULATIONS
(1) Products
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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 or intend periodically to
submit their products 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.
Direct-to-Consumer Marketing
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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 18 full-time and 9 part-time persons, one of whom is
an officer and director of the Company.
The Company had three-year employment agreements with two officers
which were scheduled to expire September 30, 1994. The terms of the
agreements provide, among other items, for annual compensation totaling
$205,000 for both officers, cash bonuses based on the Company's
profitability, and certain restrictive covenants with a term of two years
after the date of termination of employment.
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Effective May 2, 1994, John Riemann terminated his employment with the
Company in connection with the formation of BFS, which contracted with the
Company to provide required franchise services to existing franchise
locations, and to offer and sell Biogime franchise rights in additional
specified areas in the United States. As of May 2, 1994, the Company no
longer had any obligations under Mr. Riemann's employment contract.
In July 1994, the Company extended the employment contract with John
Southwell to September 30, 1995 under the same terms. In November 1994, the
Company and Southwell reached a settlement agreement whereby the Company
would continue to compensate Southwell at the rate of $7,000 per month
through September 30, 1995 in return for his resignation from all officer
positions in the Company effective November 1, 1994, settlement of all
obligations from Mr. Southwell to the Company, and an agreement not to
bring legal action against the Company. On November 15, 1994, Mr. Southwell
voluntarily resigned as a director.
During fiscal year 1995 the company had consulting agreements with two
individuals, both of whom were directors of the company. These agreements
expired as of October 31, 1994. During fiscal year 1994, the Company had
consulting agreements with two individuals who were directors of the
company. These agreements expired as of October 31, 1994.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases 11,100 square feet of office and warehouse space
within a business park setting in Houston, Texas. The Company also leases
retail space for each Company-owned retail center which it operates under
the Biogime 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 $128,000,
$98,000, $46,000 and $8,600 in fiscal years 1996, 1997, 1998, and 1999
respectively.
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ITEM 3. LEGAL PROCEEDINGS
The Company, among others, was sued in October 1993 by Selina
Southwell (the "Plaintiff") in the United States District Court for the
Southern District of Texas, Houston, Texas, for declaratory judgment and
the recovery of damages in the approximate amount of $325,000 for actual
damages and not less than $10,000 for punitive damages arising from alleged
violations of Ms. Southwell's constitutional rights under the Fourth and
Fourteenth Amendments of the United States Constitution, and allegations of
fraud, misrepresentation, deceit, wrongful conversion, conspiracy, breach
of contract, and violations of the fair trade laws of Texas. The Company
originally filed a Motion for a More Definite Statement, because the
Plaintiff did not differentiate the alleged improper conduct of the Company
as distinguished from the conduct of the other five named defendants. The
Company subsequently filed a Motion to Stay and Compel Arbitration of all
disputes between the plaintiff and the Company pursuant to the terms of the
Franchise Agreement with the plaintiff. Two officers and directors of the
Company, John Southwell and John Riemann, have also been sued in their
individual and representative capacities on the same grounds. The Company
has agreed to advance legal costs incurred by such officers in defense of
such action; as of December 31, 1994, the Company has incurred obligations
of less than $10,000 related to these advances. The case was dismissed in
1995 with no liability to the Company.
The Company completed an arbitration proceeding in July 1994
adjudicating the claims of Ms. Southwell as alleged in the lawsuit
described above as well as the Company's claims against Ms. Southwell for
her breach of the Franchise Agreement. The franchise of Ms. Southwell was
terminated, giving the Company all rights to franchise in the Houston
metropolitan and surrounding areas. In addition, the Company was awarded
damages on its claims and legal fees of about $105,000. The State District
Court, for Harris County Texas, has confirmed the arbitration award as a
final judgment against Ms. Southwell. The Company has filed a motion for
dismissal of the lawsuit in the United States District Court based on the
finality of the arbitration and the federal court's lack of jurisdiction.
Although the Company is pursuing collection of the claim from Ms.
Southwell, there is no receivable recorded in the financial statements, due
to the uncertainty of the timing and ultimate collectibility of the claim.
All expenses related to the defense of the lawsuit and the arbitration have
been recorded as expenses when incurred.
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 1995 fiscal year.
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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 there were no firms making a market for the Entourage stock under
the NASDAQ system. Though there is still no established market in the
Company's common stock, there have been sporadic bid and ask prices quoted
during fiscal year 1995. The following table sets forth the high and low
bid and ask prices of Entourage common stock for the periods shown. During
the fiscal year 1995, no active trading market for the Company's stock
existed. The September 30, 1995 bid and ask prices quoted reflect limited
trading as of that date. Information on December, March and June quarters
is not available.
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QUARTER ENDED BID PRICES
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Low High
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September 30, 1995... $.04 $.04
September 30, 1994... .19 .22
June 30, 1994........ .21 .22
March 31, 1994....... .18 .21
December 31, 1993.... .18 .18
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The above quotations reflect inter-dealer prices, without retail
mark-up, markdowns or commission, and may not necessarily reflect actual
transactions.
As of December 31, 1995 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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTRUCTURING
-------------
The Company incurred a net loss of $718,000 in fiscal 1995. During
1995 the Company continued a restructuring program that included closing
three unprofitable retail stores, significantly reducing advertising
expenditures, refocusing and re-emphasizing the direct marketing division,
and controlling operating and general and administrative expenses.
The Company closed three of its retail stores in January, February,
and March 1995. The Company had included as restructuring expenses
approximately $165,000 in the year ended September 30, 1994 related to
these stores. These costs primarily include the estimated write-off of
leasehold improvements and other assets, inventory, settlements of lease
commitments, severance payments and related legal fees. The net sales from
these three stores were less than $40,000 in fiscal year 1995, before
closing, less than $200,000 in fiscal year 1994 and were $0 in fiscal year
1993.
Effective September 30, 1994, the Company restructured its direct
marketing program, including a new marketing, compensation and execution
plan. In connection with these significant changes in the direct marketing
plan, the Company recognized about $60,000 in expenses in the year ended
September 30, 1994.
During 1995 an agreement was reached where the Company acquired
certain assets including a product line marketed under the name "Swipe" for
$300,000. A cash advance was made to the Company in the amount of $250,000
by the selling company and proceeds from this advance were used to repay
the Company's bank line of credit.
In December 1995, the Company replaced its Chief Executive Officer,
Ms. Julie Martin. In December 1995 the Company completed a transaction
transferring certain assets, liabilities, and obligations of its direct
sales division to a privately held corporation controlled by certain
shareholders of the Company, and negotiated an operating capital loan from
BFS, all of which are further discussed herein.
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The Company currently has no other credit facilities, and must rely on
cash management and profitability during fiscal year 1996 . Although
management believes the Company will improve its profitability, if
liquidity shortages continue, additional funds will become necessary from
outside the Company.
LIQUIDITY
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The Company has experienced severe liquidity shortages beginning in
August 1994. Legal expenses associated with the asset, liability and
obligation transfer of the direct sales division in December 1995, further
stagnation of the direct sales division's sales, lower than expected
profitability in corporate retail stores and less than anticipated
purchases from BFS have contributed to the decline in liquidity and capital
position. As of September 30, 1995, the Company had current liabilities in
excess of current assets of $202,803, compared with working capital of
$271,093 as of September 30, 1994, primarily as a result of the loss in
1995 of $718,384. The Company's cash balance as of September 30, 1995 was
$33,405, a decrease from $101,337 as of September 30, 1994. The Company
decreased its accounts payable and accrued liabilities by about $80,547,
repaid $200,000 on its canceled line of credit, and liquidated about
$28,107 in prepaid expenses during the fiscal year 1995. In addition, long-
term assets were reduced by $31,313 which were non-cash losses.
During 1994 and 1995, as sales declined, cash liquidity declined, and
the Company's primary lender asserted an unspecified default, and in
December 1994 declared a default and offset funds in the Company's
accounts. In January 1995, the Company and the bank negotiated an agreement
whereby the outstanding loan principal of $70,000 was repaid.
In December 1994, the Company entered into an agreement to acquire
certain assets of a product line marketed using the name "Swipe" for
$300,000. In addition the acquisition included the commitment by the
selling company to advance $250,000 to Entourage for working capital.
Payment for the acquisition was a note payable to the seller for $550,000
with repayment terms as follows: no payments until September 1995, interest
only payments from September 1995 to December 1995, a monthly payment
including interest of about $8,000 from January 1996 through November 30,
1996, and a balloon payment for the remaining principal due November 30,
1996. In addition the Company has collateralized the note with certain
assets and the note is convertible into Entourage common stock at the rate
of $.47 per share. Entourage also awarded warrants to the seller for 10,000
shares of common stock exercisable at a price of $.10 per share. The
Company was told the product line has revenues of about $400,000
(unaudited) per year, which is less than 10% of the Company's net sales. No
money was paid on the purchase note from September 1995 to the subsequent
asset, liability and obligation transfer of the direct sales division in
December 1995, pursuant to which this note obligation was extinguished.
Subsequent to September 30, 1994, the Company converted accounts
payable of approximately $110,000 to a note payable with its primary
vendor. The note had an interest rate of 10% and was due in twelve monthly
installments of approximately $9,600 per month beginning November 1, 1994.
This note was paid in full in September of 1995.
15
<PAGE>
The effect of the acquisition of the "Swipe" assets and the agreement
with the bank on the Company's liquidity was positive. During 1995, the
Company closed three retail stores without costs significantly in excess of
those accrued as of September 30, 1994 and recognized in restructuring
expenses in the year ended September 30, 1994.
On December 21, 1995 an agreement was reached transferring certain
assets, related liabilities and obligations of its Direct Sales Division to
a privately owned corporation owned by certain exchanging shareholders
James L. Davis (Director), Donna Axum-Whitworth (Director), Jon P. Goodman
(Director), Julie T. Martin (President and C.E.O.). In connection
therewith, 1,050,000 shares of the Company's common stock were surrendered
by these former shareholders.
<TABLE>
<S> <C>
TRANSFERRED ASSETS
Cash 38,000
Receivables 58,500
Inventory 230,000
Prepaids 3,700
Fixed Assets
Net of Depreciation 42,000
Other 173,000
-------
Total 545,200
=======
</TABLE>
<TABLE>
TRANSFERRED LIABILITIES
<S> <C>
Accounts Payable 296,000
Accruals 130,000
Notes 188,000
-------
Total 614,000
=======
</TABLE>
After the closing of this transaction, a working capital note was
arranged between Entourage and BFS whereby $175,000 was loaned to Entourage
by BFS. The reductions in debt associated with this transaction and the
expense reductions possible due to the elimination of the Direct Sales
Division should further improve liquidity for the Company.
If management cannot achieve its 1996 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. The Company currently has no other credit facilities, and must
rely on cash management and profitability during fiscal year 1996 in order
to continue operations. If liquidity shortages continue, additional funds
will become necessary from outside the Company. Due to the deterioration of
earnings and working capital, and the net capital deficiency, there is
substantial doubt about the Company's ability to continue as a going
concern.
16
<PAGE>
OPERATIONS--1995 COMPARED TO 1994
- ---------------------------------
Entourage incurred a net loss of $718,384 for the fiscal year ended
September 30, 1995 compared with a net loss of $893,693 for the fiscal year
ended September 30, 1994. The 1995 profit contribution compared with 1994
from the three largest operating divisions (Company-owned retail stores,
Direct Sales, and franchise sales) declined significantly. During the
period the Company recorded expenses of continued restructuring of its
Direct Sales Division, continued decline in sales levels, legal expense
related to the asset, liability and obligation transfer of the direct sales
division, accounting and professional fees related to the year end audit
and interest expense related to the "Swipe" note.
The Company incurred a substantial loss in the quarter ended September
30, 1995 primarily because of expenses and write-offs related to materials,
computer software, and other items related to the restructuring of the
multi-level marketing division, and operating losses.
For the fiscal year ended September 30, 1995, total sales decreased by
$2,221,243, or 41% compared with 1994, and gross margins decreased by
$1,793,100, or 51% in fiscal year 1995 compared with fiscal year 1994. The
sales decrease in retail stores was about $1,680,473 (57%) in 1995 compared
with 1994; however, direct sales decreased about $219,000 (20%) in 1995
compared with 1994, and franchise sales decreased $434,000 (60%) in 1995
compared with 1994.
SALES BY DIVISION AS A PERCENT OF TOTAL SALES
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Company-owned Retail Stores............. 50% 62%
Franchised and Licensed Retail Stores... 12% 15%
Direct Sales through Distributors....... 35% 19%
Other................................... 3% 4%
</TABLE>
Overall margins decreased from 73% of sales in 1994 to 67% of sales in
1995 primarily because a smaller percentage of sales were through the
retail stores that historically have higher margins.
17
<PAGE>
RETAIL DIVISION
The retail division had an operating profit of about $242,000 for the
fiscal year 1995, or about $212,000 more than the profit contribution of
$30,000 in 1994. The Company closed three stores in 1995, and those stores
contributed losses of about $26,500 in 1995. The remaining stores had a
profit contribution of about $268,500 or $44,750 average per store in 1995
compared with a profit contribution of about $200,000 or $33,000 average
per store in 1994.
Net margins in the retail division were 18% in 1995 and 13% in 1994.
During 1995, operating expenses remained about the same as 1994 as a
percentage of sales, reflecting consistent cost of personnel and store
operations. Advertising as a percent of sales in the retail division
decreased from 53% in 1994 to 13% in 1995. The Company has reduced
advertising expenditures monthly since July 1994. In addition, costs
related to advertising are expected to be spent on media in addition to the
Company's infomercial.
The sales decrease of $1,680,000 from 1994 to 1995 resulted from the
closing of three retail stores opened in 1993 and 1994. Average monthly
sales per store decreased from $30,483 in 1994 to $12,000 in 1995.
Excluding the three stores closed, the average sales per store in 1995 was
$16,833.
DIRECT MARKETING DIVISION
The profit contribution of the direct marketing division was about
$63,000, or $277,000 less in 1995 than in 1994, primarily due to decreased
sales resulting in decreased margins, which were partially offset by a
decrease in operating costs. Margins in the direct marketing division were
42% in 1995 and 45% in 1994. Costs from the manufacturer, costs of
ancillary sales materials, and commissions were each a higher percentage of
sales in 1995.
The sales decrease of about $222,000 from 1994 to 1995 in direct
marketing resulted from lower sales volume to fewer independent
distributors. The Company announced a new commission plan on September 30,
1994, based on the recommendations of a marketing consultant engaged in
August 1994.
FRANCHISE DIVISION
The profit contribution of the franchise division was about $176,625
in 1995, or $36,000 more in 1995 than in 1994, primarily due to a decrease
in operating costs. As of May 2, 1994, the Company began selling product to
BFS at prices substantially less than previous sales directly to
franchisees. The lower sales prices resulted in an expected decrease in
sales and gross margin.
However, as contemplated by the agreement with BFS, operating costs
were reduced by about $348,000 as a result of decreased personnel required
in the franchise division. Margins in the franchise division are expected
to be about 50% in the future, based upon the BFS pricing agreement;
however, operating expenses are expected to be reduced to about $5,000 per
month. Based on current volume of sales, management expects the profit
contribution of the franchise division to continue at the levels of 1995.
18
<PAGE>
INTERNATIONAL DIVISION
The international division contributed about $51,000 in profit in
fiscal 1995 on sales of about $97,500. In 1994, the profit contribution was
about $90,000 on sales of about $170,000. Management expects to continue to
support the international division, but use limited financial resources to
do so.
CORPORATE EXPENSES
Corporate expenses increased about $103,245 from 1994 to 1995
primarily as a result of expenses arising from Mr. Southwell's termination
totaling $77,000 and director fees totaling $69,000.
OPERATIONS--1994 COMPARED TO 1993
---------------------------------
For the fiscal year ended September 30, 1994, net sales increased by
14%, to approximately $4,756,000, as compared to fiscal year 1993. This
increase is primarily due to the sales increase in the Company-owned retail
stores of 62% from approximately $1,655,000 in 1993 to almost $2,944,000 in
1994. The increase in sales in the Company-owned Retail Stores were
partially offset by decreases in sales in the Direct Sales Division of 13%,
from about $1,369,000 to just over $1,190,000 and decreases in sales to
franchised and licensed Retail Stores (the Franchise Division), of 56% from
approximately $990,000 to about $428,000.
SALES BY DIVISION AS A PERCENT OF TOTAL SALES
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Company-owned Retail Stores 62% 39%
Franchised and Licensed
Retail Stores 15% 24%
Direct Sales through Distributors 19% 33%
Other 4% 4%
</TABLE>
19
<PAGE>
As a result of the substantial increase in sales from Company-owned
Retail Stores which have a higher gross margin, the cost of sales as a
percent of sales has dropped in the current fiscal year to 27% compared to
30% the previous year, resulting in a 19% increase in gross margin for the
current year compared to the previous year.
Operating expenses increased by just over $303,000 during the
------------------
current year compared to the prior year. This increase was due to the
increase in the number of Company-owned retail stores during the year from
three to nine. The increase was related to personnel costs and additional
lease and occupancy costs due to the added number of Company-owned retail
stores.
Advertising expenses increased to just over $1,552,000 in 1994
--------------------
compared to approximately $811,000 in the previous year due to the
increased use of advertising in the new markets covered by Company-owned
retail stores; primarily the infomercial produced by the Company.
General and administrative expenses decreased by $60,000 and declined
-----------------------------------
from 19% of sales in 1993 to 15% of sales in 1994.
Professional services expenses increased by approximately $160,000
------------------------------
primarily as a result of litigation expenses.
Depreciation expense increased by 31% in the current fiscal year as
compared to fiscal year ended 1993 as a result of the addition of over
$382,000 (at cost) in property and equipment purchased for the Company-
owned retail stores.
Operating margin and income from operations both decreased in the
current fiscal year mainly as a result of the costs associated with the
opening of the additional Company-owned retail stores, the operating losses
in those locations in the first months of operation, and additional
advertising expenses. Losses for the newly opened Company-owned retail
locations totaled approximately $220,000 as of September 30, 1994.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In October 1995, Statement of Financial Accounting Standards No. 123, "
Accounting for Stock-Based Compensation" (SFAS 123) was issued encouraging
companies to adopt a fair value based method of accounting for stock-based
compensation plans rather than the intrinsic value based method provided
for by Accounting Principals Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Companies that continue to apply the
provisions of APB 25 must disclose, on a proforma basis, the effects on net
income and earnings per share as if the SFAS 123 has been applied. The
Company has not determined the method to be used in accounting for stock-
based compensation.
In March 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS 121) was issued. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be used,
or to be disposed of. The Company has not determined the impact of adoption
of SFAS 121 on the financial position or results of operations.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REFERENCE PAGE
Independent Auditor's Report..........................22
Balance Sheet--September 30, 1995 and 1994............23
Statements of Operations--Years ended
September 30, 1995 and 1994...................24
Statements of Stockholders' Equity--Years ended
September 30, 1995 and 1994...................25
Statements of Cash Flows--Years ended
September 30, 1995 and 1994 ..................26
Notes to Financial Statements......................27-40
21
<PAGE>
Independent Auditor's Report
----------------------------
The Board of Directors and Stockholders
Entourage International, Inc.:
We have audited the accompanying balance sheets of Entourage International,
Inc., (the Company) as of September 30, 1995 and 1994 and the related
statements of operations, stockholders' equity, and cash flows for the
years 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 audits 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 audits
provide 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 1994 and the results of
its operations and cash flows for the years 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 discussed in Note 11 to the
financial statements the Company has suffered a deterioration of earnings
and working capital 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 11. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG Peat Marwick LLP
Houston, Texas
November 22, 1995
22
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
========== ===========
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 33,405 $ 101,337
Trade accounts receivable, net 5,039 91,279
Current portion of long term receivable -- 2,645
Inventory 213,971 320,260
Prepaid expenses and other current assets 3,683 31,790
---------- -----------
Total Current Assets $ 256,098 $ 547,311
Property and equipment, net $ 109,930 $ 220,942
Non-compete agreement, net 7,185 28,936
Long-term receivable, net of current portion 46,964 --
Other assets 188,730 28,134
---------- -----------
Total Assets $ 608,907 $ 825,323
========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 505,865 $ 598,404
Revolving line of credit and other
current debt 110,667 200,000
Current portion of long-term debt 89,250 20,000
---------- -----------
Total Current Liabilities $ 705,782 $ 818,404
Non-current liabilities:
Long-term debt, net of current portion $ 579,590 $ 10,000
---------- -----------
Total Liabilities $1,285,372 $ 828,404
---------- -----------
Stockholders' equity:
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
shares: 5,520,101 at September 1995 and
4,770,101 shares at September 1994 $ 5,520 $ 4,770
Additional paid-in capital 3,076,689 3,032,439
Accumulated deficit (3,662,250) (2,943,866)
Less: 794,527 shares in 1995 and
1994 of common stock held in
treasury at cost (96,424) (96,424)
---------- -----------
Total stockholders' equity (deficit) (676,465) (3,081)
---------- -----------
Commitments and Contingencies
Total liabilities and stockholders' equity $ 608,907 $ 825,323
========== ===========
</TABLE>
See accompanying notes on financial statements.
23
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales $2,534,910 $4,756,153
Cost of sales 835,875 1,264,018
---------- ----------
Gross margin 1,699,035 3,492,135
---------- ----------
Expenses:
Operating expenses $1,440,940 $1,378,269
Advertising expenses 173,034 1,552,190
Selling and general administrative 424,247 732,733
Professional services 216,335 300,297
Depreciation and amortization 130,364 154,209
Restructuring expenses -- 225,620
---------- ----------
Total operating expenses $2,384,920 $4,343,318
---------- ----------
Loss from operations $ (685,885) $ (851,183)
Other expense (32,499) (42,510)
---------- ----------
Loss before income taxes $ (718,384) $ (893,693)
---------- ----------
Income Taxes -- --
---------- ----------
Net loss $ (718,384) $ (893,693)
========== ==========
Net loss per common share $ (0.14) (0.23)
========== ==========
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------ ----- PAID-IN ACCUMULATED -------------- STOCKHOLDERS
SHARES $ AMOUNT CAPITAL (DEFICIT) SHARES $AMOUNT EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30, 1993 4,740,101 4,740 3,023,469 (2,050,173) (764,527) (91,324) 886,712
Purchase of treasury
stock (30,000) (5,100) (5,100)
Issuance of common
stock for services
rendered 30,000 30 8,970 9,000
Net Loss (893,693) (893,693)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances,
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)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances,
September 30, 1995 5,520,101 5,520 3,076,689 (3,662,250) (794,527) (96,424) (676,465)
========= ===== ========= ========== ======== ======= ========
</TABLE>
25
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net (loss) (718,384) (893,693)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 130,364 154,209
Loss on disposals of property and equipment 81,802 161,822
Loss on settlement of lease obligations 70,000 --
Expense recognized for common stock issued for services 45,000 9,000
Changes in assets and liabilities:
Decrease in trade accounts receivable 86,240 11,581
Decrease (increase) in inventory 186,970 (32,943)
Decrease in prepaid expenses and
other current assets 28,107 125,238
Increase in other assets (3,312) --
Increase (decrease) in accounts payable
and accrued liabilities (92,539) 344,041
--------- ---------
Total adjustments 532,632 772,948
--------- ---------
Net cash used by operating activities (185,752) (120,745)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (61,687) (147,141)
Increase in other assets -- (5,121)
Principal repayments on related party and
other note receivables -- 65,536
--------- ---------
Net cash used in investing activities $ (61,687) $ (86,726)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowing 399,507 200,000
Repayment of line of credit (200,000) --
Repayment of long-term debt (20,000) (20,000)
Purchase of treasury stock -- (5,100)
--------- ---------
Net cash provided by financing activities $ 179,507 $ 174,900
--------- ---------
Net decrease in cash $ (67,932) $ (32,571)
Cash at beginning of year $ 101,337 $ 133,908
--------- ---------
Cash at end of year $ 33,405 $ 101,337
========= =========
Supplemental disclosure of cash flow information - cash
paid during the year for interest $ 60,133 $ 18,737
========= =========
Supplemental disclosure of non-cash transactions - issuance of debt for:
Acquisition of assets $ 300,000 $ --
Settlement of lease obligations $ 70,000 $ --
========= =========
</TABLE>
See accompanying notes to financial statements
26
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
(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 a national network
of independent distributors and Retail Stores which are Company-owned or
operated by franchisees in Texas, California, Colorado, Florida, Georgia,
Illinois, Nevada, Hawaii and Oklahoma.
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. As of September 30, 1995 and 1994, there
are no cash equivalents.
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 two vendors. These items are
readily available from these or other vendors.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
straight-line over the estimated useful lives of the assets, which range
from three to five years.
LONG TERM RECEIVABLE
The actual inventory received in the Swipe transaction was less than
amounts contemplated in the agreement and a related receivable has been
recorded. It has been classified as long term, due to the fact that the
offsetting note is long term.
(Continued)
27
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
NON-COMPETE AGREEMENT
As part of the purchase of the San Jose store from a franchisee, that
franchisee signed a three-year non-compete agreement. The Company is
amortizing the cost of that agreement using the straight-line method over
the term of the agreement.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors or to
retail stores operated by licensees or franchisees. Sales are recorded when
products are shipped, except that in the case of the Company-owned retail
stores, sales are recorded when sold to a retail customer.
Net sales represent orders shipped, less estimated returns and allowances.
Rebates and commissions (for sales to independent distributors) are
included in cost of sales. Rebates and commissions are computed monthly for
independent distributor sales from the Company and are calculated using
specific rates based upon actual sales volume. Provisions have been made
for estimated returns and allowances at the time of sale. At September 30,
1995 and 1994, substantially all of the trade accounts receivable were from
Biogime Franchise Services, Inc. ("BFS") or Retail Stores operated by
franchisees or licensees; thus, the allowance for doubtful accounts is
nominal.
INCOME TAXES
The Company adopted the provisions of the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (Statement 109) as of October 1,1993. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amount of existing assets and
liabilities and their respective tax bases. To the extent that current
available evidence about the future raises doubt about the realization of a
deferred tax asset, a valuation allowance must be established. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. In adopting
Statement 109, there was no cumulative effect of the change in accounting
for income taxes.
(Continued)
28
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share have been computed by dividing net
earnings by the weighted average number of common and common equivalent
shares outstanding during the respective periods. Common equivalent shares
include shares which would be issuable upon the exercise of outstanding
stock options reduced by the number of shares which are assumed to be
repurchased by the Company with the proceeds from the exercise of the stock
options at the average market price during the respective period. Certain
outstanding stock options and warrants have been excluded from the
computation of earnings per common share because their effect would be
antidilutive in each of the respective years. Weighted average shares
outstanding amounted to 5,267,361 in 1995 and 3,954,324 in 1994.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) was issued encouraging
companies to adopt a fair value based method of accounting for stock-based
compensation plans rather than the intrinsic value based method provided
for by Accounting Principals Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Companies that continue to apply the
provisions of APB 25 must disclose, on a proforma basis, the effects on net
income and earnings per share as if the SFAS 123 has been applied. The
Company has not determined the method to be used in accounting for stock-
based compensation.
In March 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be disposed of" (SFAS 121) was issued. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used, or to be disposed of. The Company has not determined the impact
of adoption of SFAS 121 on the financial position or results of operations.
29
<PAGE>
PROPERTY AND EQUIPMENT
At September 30, 1995 and 1994, property and equipment consisted of the
following:
1995 1994
Leasehold improvements 199,851 199,852
Equipment 183,224 240,987
Software 81,651 61,176
------- -------
464,726 502,015
Accumulated depreciation 354,796 281,073
------- -------
109,930 220,942
======= =======
OTHER ASSETS
Other assets consist of the following at September 30, 1995 and 1994:
1995 1994
Goodwill 188,785 13,784
Accumulated Amortization (24,709) (6,993)
------- -------
164,076 6,791
Deposits 24,654 21,343
------- -------
188,730 28,134
======= =======
Goodwill is amortized using the straight line method over 10 years.
(Continued)
30
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 1995 and
1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Trade accounts payable $351,311 $328,027
Accrued commissions 23,501 18,548
Accrued expenses 103,813 212,248
Other 27,240 39,581
-------- --------
Total $505,865 $598,404
======== ========
</TABLE>
(5) REVOLVING LINE OF CREDIT
During the fiscal year 1993, the Company obtained a $200,000 revolving
line of credit from a bank collateralized by the Company's accounts
receivable and inventory and the personal guarantee of Mr. Southwell.
The interest rate for the credit line was the bank's base rate plus
1-1/2%. There were no continuing costs to maintain this line of
credit.
The Company borrowed $200,000 on the line of credit during fiscal year
1994. The Company used the credit line to finance its continued
expansion of retail stores.
The Company and the bank negotiated an agreement whereby the loan
principal was reduced by about $130,000 and the remaining $70,000 was
paid in March, 1995.
Subsequent to September 30,1995 the company negotiated an operating
capital loan from BFS to fund operations after the December 21, 1995
asset, liability and obligation transfer of its Direct Sales Division
(see footnote 11). The operating capital loan is in the form of a
demand note, signed by the Company and collateralized with the assets
of the company. The interest rate on the note is 8% per year.
(Continued)
31
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
LONG-TERM DEBT
Notes payable consist of the following at September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to vendor in
monthly principal installments
of $4,000, due October 31, 1997
interest at 10% $118,840 --
Note payable to Petrolon,
interest payments only through
December 31, 1995, principle and
interest payment of $7,767 from
January 1, 1996 through October
31, 1996, remaining balance due
November 30, 1996, interest at 10% 587,754 --
-------- --
$706,594 --
Less current portion $ 89,250 --
-------- --
$617,344 --
========
</TABLE>
Future payments of long-term debt at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 89,250
1997 594,504
1998 22,840
--------
$706,594
========
</TABLE>
(7) FEDERAL INCOME TAXES
The following reconciles federal income taxes computed at the statutory
rate of 34% with income taxes as reported.
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1994
--------- ---------
Expected income tax benefit at 34% (244,251) (303,856)
Change in beginning of year
valuation allowance 244,251 303,856
-------- --------
Income tax expense -- --
======== ========
Effective tax rate -- --
======== ========
</TABLE>
(Continued)
32
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets at September 30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Loss carryforwards $1,292,128 $ 981,285
Property and equipment, principally due to
differences in depreciation 46,436 76,513
Receiviables, principally due to
allowances for doubtful accounts and
notes receivable 2,411 23,392
Covenant not to compete, principally due
to differences in depreciation 8,083 8,050
Accrued expenses, not yet
deductible for tax purposes 5,602 21,887
Other, net 6,969 6,969
---------- ----------
1,361,692 1,118,096
Less valuation allowance (1,361,692) (1,118,096)
---------- ----------
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 the net operating losses existing and available to carry
forward at September 30, 1995.
At September 30, 1995, the Company had a net operating loss carryforward of
approximately $3,800,376 . If not used to offset future income, these loss
carryforwards will expire between 2001 and 2010.
(8) STOCK PURCHASE AND STOCK OPTION PLANS
The Company adopted a qualified Incentive Stock Option Plan (the "ISOP")
effective April 13, 1992 and amended the ISOP December 11, 1992, which was
ratified by the shareholders at the Annual Meeting. Pursuant to the ISOP,
Entourage may grant options on a discretionary basis to key employees,
including officers and directors. An aggregate 105,000 shares are
available for issuance.
(Continued)
33
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
The Board may issue the options to different participants subject to varying
vesting requirements based on the Company's performance levels. The exercise
price of any 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. 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.
With certain exceptions, options may not be transferred or assigned and must be
exercised prior to the date of expiration or within three months.
Changes in stock options in the ISOP Plan for the two year period ended
September 30, 1995 are as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
-------- -----------
<S> <C> <C>
Outstanding at
October 1, 1992 10,000 $.15
Granted 95,000 $.15-$.31
Exercised (10,000) $.15
Canceled (20,000) $.31
------- ---------
Outstanding at
October 1, 1993 75,000 $.15-$.31
=======
Granted 0
Exercised 0
Canceled (55,000) $.15-$.31
-------
Outstanding at
September 30, 1994 20,000 $.15-$.31
=======
Granted 0
Exercised 0
Canceled 0
-------
Outstanding at
September 30, 1995 20,000 $.15-$.31
=======
Exercisable 13,333 $.15-$.31
</TABLE>
34
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
The Company also adopted a Non-qualified Stock Option Plan ( the "Non-
qualified Plan") effective April 13, 1992, which was ratified by the
shareholders at the Annual Meeting, and has reserved 50,000 shares of
common stock 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. During the year ended September 30, 1992,
the Company granted options for 20,000 shares under the Plan at $.15 per
share. The options were exercised during year ended September 30, 1993.
In January 1993, the Company granted options for 100,000 shares to two
directors at $.53 per share. During year ended September 30, 1993, options
on 50,000 of the shares were exercised.
In October 1994, the company hired a Chief Executive Officer (CEO) to
replace Mr. Southwell, the previous CEO. The Company has a letter
agreement which awards options to the CEO to purchase 300,000 common shares
at $.20 per share. The option is exercisable upon the Company meeting
certain objectives. In addition, if the CEO is terminated by the Company,
there is a severance payment of $15,000 due to the CEO. The CEO was
replaced in December, 1995 with no liability to the company for severance
payments and the stock option was eliminated.
(9) COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
During 1995 and 1994, the Company leased 11,100 square feet of office and
warehouse space within a business park setting in Houston, Texas, and
leased retail space in each city in which it has a retail store. Lease
expense in 1995 and 1994 was approximately $220,000 and $231,000,
respectively and future commitments are approximately $169,000, $97,000,
$17,000, $81,000 and $32,000 in 1996, 1997, 1998 and 1999, respectively.
There are no additional lease payments after 1998.
The lease was terminated as of January 1995 as a direct result of the spin
off.
LEGAL PROCEEDINGS
The Company, among others, was sued in October 1993 by Selina Southwell
(the "Plaintiff") in the United States District court for the Southern
district of Texas, Houston, Texas, for declaratory judgment and the
recovery of damages in the approximate amount of $325,000 for actual
damages and not less than $10,000 for punitive damages arising from alleged
violations of Ms. Southwell's constitutional rights under the Fourth and
Fourteenth Amendments of the United States Constitution, based on
allegations of fraud, misrepresentation, deceit, wrongful conversion,
conspiracy, breach of contract, and violations of the fair trade laws of
Texas. The Company has filed a Motion for a More Definite Statement,
because the Plaintiff does not differentiate the alleged improper
35
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
conduct of the Company as distinguished from conduct of the other five
named defendants. Two officers and directors of the company, John Southwell
and John Riemann, have also been sued in their individual and
representative capacities on the same grounds. The case was dismissed in
1995.
The Company completed an arbitration proceeding in July 1994 related to the
claims of Ms. Southwell as alleged in the lawsuit described above. The
Company was awarded all rights to the franchise in the Houston metropolitan
area and claims and legal fees of about $105,000. The Company is proceeding
to file for dismissal of the lawsuit with the United States District Court
based on the results of the arbitration. Although the Company is pursuing
collection of the claim from Ms. Southwell, there is no receivable recorded
in the financial statements, due to the uncertainty of the timing and
ultimate collectibility of the claim. All expenses related to the defense
of the lawsuit and the arbitration have been recorded as expenses when
incurred.
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 $42,000 and $47,000 in 1995 and 1994, respectively.
(10) TRANSACTIONS WITH AFFILIATES
Effective October 1, 1991, the company entered into three year employment
agreements with Mr. Southwell and Mr. Riemann. The terms of the agreements
provide, among other items, for annual compensation totaling $205,000 cash
bonuses based on the company's profitability, and certain restrictive
covenants with a term of two years after the date of termination of
employment. In July 1994, the Company extended the employment contract
with John Southwell to September 30, 1995 under the same terms.
The Company sold product of approximately $15,000 in 1995 and 1994,
respectively, to retail stores owned by John Southwell, a stockholder,
director and officer, under normal commercial terms. As of September 30,
1995 and 1994, the Company had trade receivables of approximately $19,000
from the retail store owned by Mr. Southwell. The trade receivables from
the store were repaid under terms of the settlement agreement with Mr.
Southwell, as discussed below.
In addition, the Company has a note receivable and accrued interest from
Mr. Southwell of $30,800 as of September 30, 1995 and 1994, respectively.
The note receivable and accrued interest were repaid under terms of the
settlement agreement with Mr. Southwell, as discussed below.
36
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
In November 1994, the Company and Southwell reached a settlement agreement
whereby the Company would continue to compensate Southwell at the rate of
$7,000 per month through September 30, 1995; in return for his resignation
from all officer positions in the Company effective November 1, 1994,
settlement of all obligations from Mr. Southwell to the Company, and an
agreement not to bring legal action against the Company. On November 15,
1994, Southwell voluntarily resigned from the Board of Directors.
The Company contracted BFS, a newly-formed company owned by John Riemann,
effective May 2, 1994 to provide all franchise services formerly conducted
by the Company through its franchise division. The license agreement,
supply and distribution agreement and related agreements between the
Company and BFS provide to BFS a sub-license to use certain marks,
software, other copyrighted materials and the Biogime franchise system in
order to further develop a franchise program for the Biogime Skincare
Centers.
BFS was granted the exclusive right to provide the Biogime product and
required franchise services to existing franchise locations, and to offer
and sell Biogime franchise rights in additional specified areas in the
United States. Additionally BFS was granted the right to offer, sell and
service franchises subject to a right of first refusal arrangement with the
Company to open a Company-owned retail store in other specified areas of
the United States.
The agreements are perpetual; the supply and distribution agreement may be
terminated if certain minimum purchase levels are not reached by BFS,
which could then cause cancellation of the license agreement.
BFS will purchase from the Company all the Biogime product requirements of
existing and future Biogime franchise locations, based on an agreed upon
pricing schedule.
In connection with the BFS agreements, effective May 2, 1994, John Riemann
terminated his employment with the Company in connection with the formation
of BFS, which contracted with the company to provide required franchise
services to existing franchise locations, and to offer and sell Biogime
franchise rights in additional specified areas in the United States. As
of May 2, 1994, the Company no longer had any obligations under Riemann's
employment contract. Mr. Riemann remains a director of the Company.
In fiscal year ended September 30, 1995, the Company sold approximately
$292,000 of products to BFS, and has a trade receivable of $22,000, as of
September 30, 1995,
The Company sold product of approximately $101,000 in 1994 to retail stores
owned by Mr. Riemann under normal commercial terms.
(Continued)
37
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
During fiscal year 1994, the Company had consulting agreements with two
individuals, both of whom are directors of the company. These agreements
expired as of September 30, 1994. The Company paid James Davis, a
stockholder and director, consulting fees of $2,500 and $23,000 in 1995 and
1994 respectively, for financial advisory services. The agreement with Mr.
Davis expired October 31, 1994. The Company paid Donna Whitworth, a
stockholder and director, public appearance fees of about $12,000 in fiscal
year 1994. The agreement with Ms. Whitworth expired September 30, 1994.
The Company paid its directors $1,000 per year up until April 1992.
Beginning April 1992, the director fee was increased to $2,000 per year.
Each director received an additional $500 per meeting for each meeting
physically attended.
SWIPE TRANSACTION
In December 1994, the Company entered into an agreement to acquire certain
assets of a product line marketed using the name "Swipe" for $300,000. In
addition, the acquisition included the commitment by the selling company to
advance $250,000 to Entourage for working capital. Payment for the
acquisition was a note payable to the seller for $550,000 with repayment
terms as follows: no payments until September 1995, interest only payments
from September 1995 to December 1995, a monthly payment including interest
of about $8,000 from January 1996 through November 30, 1996, and a balloon
payment for the remaining principal due November 30, 1996. In addition the
Company has collateralized the note with certain assets and the note is
convertible into Entourage common stock at the rate of $.47 per share.
Entourage also awarded warrants to the seller for 10,000 shares of common
stock exercisable at a price of $.10 per share. The Company was told the
product line has revenues of about $400,000 (unaudited) per year, which is
less than 10% of the Company's net sales. No Money was paid on the purchase
note from September 1995 to the subsequent asset, liability and obligation
transfer of the direct sales division in December 1995, pursuant to which
this note obligation was extinguished.
(12) LIQUIDITY AND RESTRUCTURING
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 net loss of $718,384 for the year ended September 30, 1995 and a
deficit of $676,465 in stockholder's equity at year end.
The Company's continued existence is dependent upon its ability to achieve
its 1996 operating plan, which contemplates significantly improved
operating results and cash flow.
If management cannot achieve the 1996 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.
38
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
RESTRUCTURING
The Company closed three of its retail stores in January 1995. The Company
had included as restructuring expenses about $165,000 in the year ended
September 1994 related to these stores. These costs primarily include the
estimated write-off of leasehold improvements and other assets, inventory,
settlements of lease commitments, severance payments and related legal
fees. All such expenses are shown as accrued liabilities at September 30,
1994. The net sales from these three stores were less than $40,500 in
fiscal year 1995 and $200,000 in fiscal year 1994.
Effective September 30,1994, the Company restructured its direct marketing
program, including a new marketing, compensation and execution plan. In
connection with these significant changes in the direct marketing plan,
the Company recognized about $60,000 in expenses in the year ended
September 30, 1994.
Subsequent Events (Unaudited)
On December 21, 1995 the Company and certain individual investors entered
into an agreement with certain exchanging shareholders to transfer assets,
liabilities, and obligations related to the Direct Sales Division of the
Company to a privately held corporation controlled by the exchanging
shareholders James L. Davis (Director), Donna Axum-Whitworth (Director),
Jon P. Goodman (Director), and Julie T. Martin (President and C.E.O.).
After the transfer the privately held company, Biogime International Inc.
("BII"), will be marketing skin care products and health and nutritional
products through independent distributors in the United States and will be
directly marketing such products internationally. Entourage (EII) will be
marketing its skin care products through its traditional retail channels
which include retail stores.
As a part of this transaction the rights to the service mark and trade name
"Biogime" and the logo "Biogime" were transferred from the company to BII
who then licensed these rights back to the Company for a fifteen month
period. Additionally, an agreement was reached between the Company and BII
whereby BII will not prevent the Company from using the secondary mark and
logo "Biozhem" in connection with the operation of its business during and
after the fifteen month license period.
The Company transferred to BII assets estimated by previous EII management
to total $514,000, liabilities totaling $600,000 and preferred stock in
Biogime. The preferred stock in Biogime was issued as a result of the
conversion of the Swipe debt of $550,000 to equity in Biogime. In addition
the exchanging shareholders and directors of EII transferred to EII all of
the 1,050,000 shares of the common stock of the Company owned by the
exchanging shareholders. EII, as a result of the transaction, agreed to pay
six payments of $25,000 to BII ($150,000). Both exchanging and remaining
shareholders signed mutual Non-Competition Agreements agreeing to not
compete with the other company for a five year period.
39
<PAGE>
ENTOURAGE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
During the years ended September 30, 1995 and 1994, the Direct Sales
Division of the Company had sales, cost of sales and gross margin as
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Sales $1,320,000 $1,484,000
Cost of Sales 668,000 759,000
---------- ----------
Gross Margin $ 652,000 $ 725,000
========== ==========
</TABLE>
Effective with the transaction, and as of the closing date, Julie T. Martin
resigned as president, CEO and Director, James L. Davis resigned as
Chairman, Secretary and Director, and Jon P. Goodman and Donna Axum-
Whitworth resigned as Directors. John Riemann remained as Director and is
now Chairman of the Board, President and CEO, Stan Wylie is now acting
Chief Financial Officer, Secretary and Director, Warren L. Hernand, Paul
Reyff, Sr., and Alan Goldsberry are now Directors.
Subsequent to the closing, and as a result of a final December 21, 1995
accounting reconciliation, EII has determined that the actual assets
transferred to BII totaled $545,345 and the liabilities transferred totaled
$569,416. The largest individual asset difference is in inventory where BII
has received $50,491 more inventory than estimated as of the closing. As a
result of this, EII has exercised its rights under the Agreement by
offsetting $50,491 from the amounts due BII under the contract. BII has
disputed EII's right of offset. EII has also given notice to BII that it is
in violation of the Non-Competition Agreement.
Subsequent to year end, the Company reached an agreement with a lessor to
terminate a lease. The agreement requires the Company to make a $4,000
payment to the lessor on December 1, 1995 and six monthly installments of
$3,000 on January 1, 1996 through June 1, 1996, with no interest.
Subsequent to year end, the Company reached an agreement with a vendor to
pay an outstanding balance to the vendor. The agreement calls for three
installments of $1,400 per month beginning January 1, 1996, three
installments of $2,000 per month beginning April 1, 1996 and one remaining
installment of $2,894 in August 1996 at no interest.
(End of Notes to Financial Statement)
40
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. CURRENT DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James L. Davis 47 Chairman
John C. Riemann 55 Director
Donna Axum-Whitworth 54 Director
Jon P. Goodman 54 Director
Julie T. Martin 47 Director
</TABLE>
James L. Davis has been a director of Entourage since September 1991. He is
- --------------
currently a financial consultant for Waterford Capital, Inc., a financial
consulting firm he has owned since 1988. Before founding Waterford Capital, Mr.
Davis was a partner at the accounting firm of Deloitte, Haskins and Sells (now
Deloitte and Touche).
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. 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 from 1987 to
1992.
Donna Axum-Whitworth, Miss America 1964, has been a director of Entourage since
- --------------------
January 1993. Over the past 30 years her career has included college teaching,
producing and hosting three TV talk shows. She has also been a sales account
executive, a professional speaker, and a published author of two books. Ms.
Whitworth was recently appointed by President Clinton to the Advisory Committee
for the Arts for the John F. Kennedy Center for the Performing Arts in
Washington, D.C., and serves on a number of national boards.
Jon P. Goodman, Ph.D. has been a director of Entourage since January 1993. Dr.
- ---------------------
Goodman has been a professor in the School of Business Administration and
Director of the Entrepreneur Program at the University of Southern California
since July 1989.
Julie T. Martin was appointed President and Chief Executive Officer of Entourage
- ---------------
in November 1994, and was elected a director effective February 1, 1995. Ms.
Martin was employed by Olshan Demolishing Co., Inc. from 1986 through 1994, and
was Chief Financial Officer of that Company from 1988 through 1994.
On December 21, 1995 with the completion of the spin off, resignations were
offered and accepted from James L. Davis, Donna Axum-Whitworth, Jon P. Goodman,
Ph.D., and Julie T. Martin leaving John C. Riemann as the only remaining
Director and Officer.
41
<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 three fiscal
years ended September 30, 1995 to each of the three most highly compensated
officers:
<TABLE>
<CAPTION>
ALL OTHER
PRINCIPAL COMPEN-
NAME POSITION(S) YEAR SALARY BONUS SATION (a)
- ---- ----------- ---- --------- ----- ----------
<S> <C> <C> <C> <C> <C>
Julie Martin(b) President/CEO 1995 $ 90,000 $ 0
(since November 1994) 1994 $ 0 $ 0 $ 0
W. John Southwell President/CEO 1995 $ 84,000 $ 0 $ 0
(until November 1994) 1994 $105,000 $ 0 $3,000
1993 $105,000 $4,671 $4,000
John C. Riemann Executive Vice 1995 $ 0 $ 0 $ 0
President (until May 1994) 1994 $ 58,331 $ 0 $3,000
1993 $100,000 $4,671 $4,000
</TABLE>
Includes payments to directors for attendance at meetings.
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.
COMPENSATION ARRANGEMENTS
The Company has no employment agreement with Ms. Martin. Her annual salary
is $90,000 and the Company agreed to pay her a bonus of 20% of net income of the
Company from November 1, 1994 through September 30, 1995, provided she was
employed by the Company as of September 1995.
Effective October 1, 1991, the Company entered into three year employment
agreements with Mr. Southwell and Mr. Riemann. The terms of the agreements
provided, among other items, for annual compensation totaling $205,000 for both
executives, cash bonuses based on the Company's profitability, and certain
restrictive covenants with a term of two years after the date of termination of
employment. In July 1994, the Company extended the employment contract with
John Southwell to September 30, 1995 under the same terms.
During the period following termination of the contracts (with or without
cause), neither
42
<PAGE>
Mr. Southwell nor Mr. Riemann may engage in the business of developing,
producing or marketing products competitive with the products developed,
produced and/or marketed by the Company. Both contracts provided for an annual
salary; Mr. Southwell's salary was $105,000 annually and Mr. Riemann's salary
was $100,000 annually. Additionally, the contracts provided for a quarterly
bonus to Messrs. Southwell and Riemann in the form of a percentage of the
Company's net income before taxes. No bonuses were paid for the fiscal year
ended September 30, 1995.
In November 1994, Mr. Southwell resigned as Chief Executive Officer and
reached a settlement agreement with the Company whereby the Company would
continue to compensate Mr. Southwell at a rate of $7,000 per month through
September 30, 1995 in return for his resignation from all officer positions in
the Company effective November 1, 1994, settlement of all obligations from Mr.
Southwell to the Company, and an agreement not to bring legal action against the
Company.
The Company contracted with Biogime Franchise Services (BFS), a newly-
formed company owned by Mr. Riemann, effective May 2, 1994, to provide all
franchise services formerly conducted by the Company through its franchise
division. The license agreement, supply and distribution agreement and related
agreements between the Company and BFS provide to BFS a sublicense to use
certain marks, software and other copyrighted materials and the Biogime
franchise system in order to further develop a franchise program for the Biogime
Skincare Centers.
In connection with the BFS agreements, effective May 2, 1994, Mr. Riemann
terminated his employment with the Company. As of May 2, 1994, the Company no
longer had any obligations under Riemann's employment contracts.
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.
DIRECTOR COMPENSATION
The Company paid its directors $1,000 per year up until 1992. Beginning
April 1992, the director fee was increased to $2,000 per year. Each director
received an additional $500 per meeting for each meeting attended in person and
no compensation for telephone meetings. Directors fees since the July 1994
meeting have been accrued and remain unpaid as of September 30, 1995. (See
"Stock Transactions Involving Management")
43
<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, 1995, 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>
Directors:
John C. Riemann 505,000 0 505,000 10.7%
c/o Biogime Franchise Services
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
James L. Davis 450,000 0 450,000 9.5%
c/o Waterford Capital, Inc.
One Park Ten Place, #340
Houston, TX 77084
Donna Axum-Whitworth 0 250,000 250,000 5.3%
1230 Dogwood Ct.
Bartlesville, OK 74006
OTHERS:
W.O. Menefee 354,280 0 354,280 7.5%
P.O. Box 85
Montgomery, TX 77356
Donald L. Shriver 311,027 0 311,027 6.6%
Rt. 2, Box 50 B
Richmond, TX 77469
W. John Southwell 300,000 0 300,000 6.3%
(address unknown)
</TABLE>
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.
44
<PAGE>
Includes 5,000 shares held in street name.
Owened by Donna Axum-Whitworth Trust.
SECURITY OWNERSHIP OF MANAGEMENT
The table set forth below contains certain information, as of
September 30, 1995, regarding beneficial ownership of equity securities of
Entourage by each of the Nominees, Directors and Executive Officers and by all
of the Nominees, 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 Common 505,000(b) 10.7%
c/o Biogime Franchise Services
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
James L. Davis, Director Common 450,000(c) 9.5%
One Park Ten Place, #340
Houston, TX 77084
Donna Axum-Whitworth Common 250,000(c)(d) 5.3%
Director
1230 Dogwood Ct.
Bartlesville, OK 74006
Jon P. Goodman, Director Common 200,000(e) 4.2%
University of Southern California
School of Business Administration
Bridge Hall, Room 6
Los Angeles, CA 90089-1421
Julie T. Martin Common 150,00(f) 3.2%
Director and CEO
c/o Entourage International, Inc.
1665 Townhurst
Houston, TX 77043
Nominees, Directors, and Common 1,555,000 32.8%
Executive Officers as a Group (5 persons)
</TABLE>
45
<PAGE>
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.
Includes 5,000 shares held in street name.
Unless otherwise indicated, these shares are held under the terms of
various Entourage incentive stock option plans. See "Stock Transactions
Involving Management" and "Compensation Arrangements" below.
Owned by Donna Axum-Whitworth trust.
The Company has issued an option for 50,000 shares of its Common Stock at
$0.53 per share to Dr. Goodman which she has not exercised as of September
30, 1995.
The Company has also issued an option for 150,000 shares of its Common
Stock at $0.20 per share to Ms. Martin exercisable as follows: 75,000 on
December 1, 1995 and 75,000 on December 1, 1996.
STOCK TRANSACTIONS INVOLVING MANAGEMENT
On February 1, 1995, the directors were awarded special directors fees in
recognition of the directors' efforts during 1994 in connection with the change
of Chief Executive Officers, the dispute with the Company's primary lender, the
liquidity difficulties experienced by the Company, the acquisition of the Swipe
product line, and in recognition of inadequate compensation levels for the
directors of Entourage historically. These special directors fees are in
addition to the stated directors fees discussed under "Directors Compensation".
The directors used all cash fees to purchase shares in the Company. The
remaining special fees were in the form of share awards, in lieu of cash.
The directors were awarded special cash directors fees of $6,000 each, all
of which the directors used to purchase shares from Mr. Southwell and Mr.
Riemann. The share portion of the director award was an additional 100,000
shares valued at $0.06 per share for each director. The Chairman of the board,
Mr. Davis, was awarded an additional 200,000 shares valued at $0.06 per share
specifically for his efforts in identifying and negotiating the acquisition of
the Swipe product line. The share awards were made instead of special cash
director fees.
Mr. Southwell and Mr. Riemann each acquired their shares pursuant to two
separate incentive plans adopted by the board of directors on July 9, 1991 (the
"Southwell Plan" and the "Riemann Plan" or the "Plans"). Under the Plans, the
Board authorized the issuance of 500,000 shares of Common Stock to each of
Messrs. Southwell and Riemann at $0.06 per share which the Board determined to
be the fair market value per share after reviewing a valuation report prepared
by Waterford Capital, Inc. with respect to the shares of Entourage's stock as of
May 31, 1991. The board believed that the issuance of the shares under the
Plans was critical to Entourage's future operations. The certificates were
issued by the transfer agent on July 25, 1991 following
46
<PAGE>
payment of such shares by Messrs. Southwell and Riemann.
Each of the Messrs. Southwell and Riemann own the shares issued and
paid for by them, subject to what the Plans refer to as "vesting" requirements,
which are potential call rights by Entourage allowing it to purchase "unvested"
shares at the price the participant originally paid for the stock in the event
the participant leaves Entourage or is fired "for cause".
Based on the vesting requirements contained in the Plans, each of Mr.
Southwell and Mr. Riemann received 100,000 vested shares when the Board adopted
the Plans, and a further 200,000 shares vested in favor of each of them as a
result of earnings performance during fiscal year 1992. Since the vesting
requirements were not met in fiscal years 1993 or 1994, the remaining 200,000
shares for each of them were unvested as of September 30, 1994. These unvested
shares were acquired by current members of the Board of Directors on a pro rata
basis in February 1995.
In November 1994, Mr. Southwell resigned as Chief Executive Officer and
executed a settlement agreement with the Company whereby the Company would
continue to compensate Mr. Southwell at the rate of $7,000 per month through
September 30, 1995 in return for his resignation from all officer positions in
the Company effective November 1, 1994, settlement of all obligations from the
Company to Mr. Southwell and from Mr. Southwell to the Company, and an agreement
not to bring legal action against the Company. On November 15, 1994, Southwell
voluntarily resigned from the Board of Directors.
In February 1995, the Company assigned its rights to purchase shares
from Mr. Southwell to four directors on a pro rata basis, inasmuch as the
Company was prohibited from directly purchasing the shares. As a result, four
of the directors purchased all of Mr. Southwell's 200,000 unvested shares for
$0.06 per share, as specified in the Southwell Plan.
The Company contracted with BFS, a newly-formed company owned by Mr.
Riemann, effective May 2, 1994, to provide all franchise services formerly
conducted by the Company through its franchise division. The license agreement,
supply and distribution agreement and related agreements between the Company and
BFS provided to BFS a sub-license to use certain marks, software, other
copyrighted materials and the Biogime franchise system in order to further
develop a franchise program for the Biogime Skincare Centers.
In connection with the BFS agreements, effective May 2, 1994, Mr.
Riemann terminated his employment with the Company. As of May 2, 1994, the
Company no longer had any obligations under Mr. Riemann's employment contract.
Mr. Riemann remains a director of the Company.
In February 1995, the Company assigned its rights to purchase shares
from Mr. Riemann to four directors on a pro rata basis, inasmuch as the Company
was prohibited from directly purchasing the shares. As a result, four of the
directors purchased all of Mr. Riemann's 200,000 unvested shares for $0.06 per
share, as specified in the Riemann Plan.
In connection with the share purchases by and awards to directors
described above, Mr. Riemann received a special directors fee of $6,000, which
he used to purchase 100,000 shares for $0.06 per share, and he received an award
of 100,000 shares valued at $0.06 per share by the directors.
As an incentive to Mr. Davis to join the Board of Directors, the Board of
Directors, effective October1, 1991, authorized the issuance of 50,000 shares of
the Company's Common
47
<PAGE>
Stock to Mr. Davis upon payment by him of $0.06 per share. Mr. Davis paid for
the shares in cash during fiscal year 1992. The shares purchased by Mr. Davis
include 40,000 shares which are subject to vesting requirements based on the
Company's performance. As a result of earnings performance during 1992, 20,000
shares became vested. No additional shares have been vested as a result of the
Company's earnings performance during fiscal years 1993,1994, or 1995.
In connection with the share purchases by and awards to directors
described above, Mr. Davis received a special directors fee of $6,000, which he
used to purchase 100,000 shares for $0.06 per share, and he received an award of
300,000 shares valued at $0.06 per share by the Directors.
As an incentive to Ms. Whitworth to join the Board of Directors, the Board
of Directors, effective December 11, 1992, authorized the issuance of 50,000
shares of the Company's Common Stock to Ms. Whitworth upon payment by her of
$0.53 per share. Ms. Whitworth paid for the shares in cash in March 1993. The
shares purchased by Ms. Whitworth include 40,000 shares which are subject to
vesting requirements based on the Company's performance. As a result of
earnings performance during 1992, 20,000 shares became vested. No additional
shares have vested as a result of the Company's earnings performance during
fiscal years 1993, 1994, or 1995.
In connection with the share purchases by and awards to directors
described above, Ms. Whitworth received a special directors fee of $6,000, which
she used to purchase 100,000 shares for $0.06 per share, and she received an
award of 100,000 shares valued at $0.06 per share by the Directors.
As an incentive to Dr. Goodman to join the Board of Directors, the Board of
Directors, effective December 11, 1992, authorized the issuance of 50,000 shares
of the Company's Common Stock to Dr. Goodman upon payment of $0.53 per share and
subject to vesting requirements. As of September, 1995, Dr. Goodman has not
exercised her option.
In connection with the share purchases by and awards to directors
described above, Dr. Goodman received a special directors fee of $6,000, which
she used to purchase 100,000 shares for $0.06 per share, and she received an
award of 100,000 shares valued at $0.06 per share by the directors.
Effective February 1, 1995, the directors elected Ms. Julie Martin, the
Chief Executive Officer, to the Board of Directors to fill a vacancy, and
awarded her 150,000 shares valued at $0.06 per share, which vest 50,000
immediately and the remaining 100,000 on June 30, 1995, if Ms. Martin is an
employee of the Company on that date. In addition, the Board awarded Ms. Martin
an option to acquire an additional 150,000 shares at $0.20 per share over the
next two years.
Except as set forth above, 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. For a description of
certain transactions between Ms. Martin and Messrs. Southwell and Riemann (or
members of their families or companies they control) and Entourage, see
"COMPENSATION OF CURRENT MANAGEMENT" AND "CERTAIN TRANSACTIONS" BELOW.
48
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended September 30, 1995, 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, 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):
DIRECTORS DAVIS, RIEMANN, WHITWORTH, GOODMAN AND MARTIN. These directors were
awarded special cash directors fees and share awards valued at $0.06 per share
in February 1995. see "Stock Transactions Involving Management."
MR. RIEMANN. The Company contracted with BFS, a newly-formed 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, 1995, the Company sold approximately $292,000 of products to
BFS, and has a trade receivable of $22,000 as of September 30, 1995.
MR. SOUTHWELL. The Company, among others, was sued in October 1993 by Ms.
Selina Southwell, the former wife of Mr. Southwell for certain alleged claims.
The Company completed an arbitration proceeding in July 1994 adjudicating the
claims of Ms. Southwell as alleged in the lawsuit as well as the Company's
claims, against Ms. Southwell for her breaches of the Franchise Agreement (see
Item 3, Legal Proceedings). The franchise of Ms. Southwell was terminated,
giving the Company all rights to franchise in the Houston metropolitan and
surrounding areas. In addition, the Company was awarded damages on its claims
and legal fees of about $105,000. In February 1995, the lawsuit against the
Company was dismissed.
In November 1994, Mr. Southwell resigned as Chief Executive Officer
and reached a settlement agreement with the Company whereby the Company would
continue to compensate Mr. Southwell at a rate of $7,000 per month through
September 30, 1995. See "Stock Transactions Involving Management" and
"Compensation Arrangements."
49
<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.
EXHIBIT
NO. DESCRIPTION
--- -----------
Articles of Incorporation of Entourage International, Inc. and
amendments thereto, incorporated by reference to Exhibit No. 3.1
to Amendment No l1 to Registrant's Registration Statement of Form
S-18, filed January 16, 1986, File No. 2-99726-FW.
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.
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.
Form of Entourage International, Inc. Distributor Agreement. A copy of
the Distributor Agreement between Entourage International, Inc.
and Entourage Perfumes of New Zealand was filed as Exhibit No.
10.24 of Registrant's Registration Statement of Form S-4, filed
October 26, 1987, File N. 33-18110. Agreements with additional
distributors have been on substantially the same terms.
Employment Agreement dated October 1, 1991 between W. John Southwell
and Entourage International, Inc.
Equity Incentive Agreement dated effective July 8, 1991 between W.
John Southwell and Entourage International, Inc. for 500,000
shares of Common Stock.
Employment Agreement dated October 1, 1991 between John C. Riemann and
Entourage International, Inc.
Equity Incentive Agreement dated effective July 8, 1991 between John
C. Riemann and Entourage International, Inc. for 500,000 shares of
Common Stock.
Subscription Agreement for 50,000 share of Common Stock from Warren
Hernand to Entourage International, Inc. dated on or about
December 18,1991.
Equity Incentive Agreement dated on or about December 18, 1991 between
Warren Hernand and Entourage International, Inc. for 400,000
shares of Common Stock.
Services Agreement among IAMCO Corporation, Warren Hernand and
Entourage International, Inc. dated on or about December 18, 1991.
Subscription Agreement for 50,000 shares of Common Stock from James L.
Davis to Entourage International, Inc. dated on or about December
18, 1991.
Lease Agreement between Trammel Crow Company and Entourage
International,
50
<PAGE>
Inc. dated February 1, 1991 for office and warehouse space located
at 1665 Townhurst, Houston Texas.
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.
Settlement Agreement dated August 23, 1991 between Donald Shriver and
Entourage International, Inc.
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. I-
9206.
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.
License Agreement between Entourage International, Inc. and Biogime
Franchise Services (USA), Inc. dated May 2, 1994.
Biogime Products Supply and Distribution Agreement between Entourage
International, Inc. and Biogime Franchise Services (USA), Inc.
dated May 2, 1994.
Assignment and Assumption Agreement between Entourage International,
Inc. and Biogime Franchise Services (USA), Inc. dated May 2, 1994.
Services Agreement between Entourage International, Inc. and Gage
Research & Development Institute, Inc. dated July 12, 1994.
Settlement and Release Agreement between Entourage International,
Inc. and John Southwell dated November 1, 1994.
Asset Purchase Agreement between Entourage International, Inc. and
Diamond Falcon Corporation dated December 29, 1994.
Master Transaction Agreement incorporated by reference to form 8-K
filed on January 4, 1996.
Reports on form 8-K. One report on form 8-K was filed during the period from
July 1, 1995 through September 30, 1995.
51
<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 RIEMANN
-----------------
John Riemann, Chief Executive Officer
Date: December 12, 1996
-----------------
By: /s/ JOHN RIEMANN
------------------
John Riemann
Director
Date: December 12, 1996
-----------------
By: /s/ PAUL REYFF SR.
--------------------
Paul Reyff, Sr.
Director
Date: December 12, 1996
-----------------
By: /s/ WARREN HERNAND
---------------------
Warren Hernand
Director
Date: December 12, 1996
-----------------
By: /s/ ALAN GOLDSBERRY
---------------------
Alan Goldsberry
Director
Date: December 12, 1996
-----------------
By: /s/ STAN WILEY
----------------
Stan Wiley
Director
Date: December 12, 1996
-----------------
52
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 33,405
<SECURITIES> 0
<RECEIVABLES> 5,039
<ALLOWANCES> 0
<INVENTORY> 213,971
<CURRENT-ASSETS> 256,098
<PP&E> 366,013
<DEPRECIATION> 248,898
<TOTAL-ASSETS> 608,907
<CURRENT-LIABILITIES> 705,782
<BONDS> 0
0
0
<COMMON> 5,520
<OTHER-SE> (681,985)
<TOTAL-LIABILITY-AND-EQUITY> 608,907
<SALES> 2,534,910
<TOTAL-REVENUES> 2,534,910
<CGS> 835,875
<TOTAL-COSTS> 1,260,122
<OTHER-EXPENSES> 1,993,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,133
<INCOME-PRETAX> (718,384)
<INCOME-TAX> 0
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<NET-INCOME> (718,384)
<EPS-PRIMARY> (.14)
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