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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, 1997
Commission file number 1-9206
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ENTOURAGE INTERNATIONAL, INC.
(Name of Small Business Issuer in its Charter)
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)
Issuer's telephone number, including area code (714) 488-2184
--------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock. $.001 par value
- -----------------------------
(Title of Class)
- ----------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15 (d) of the Securities Exchange Act of 1934 during the past 12
months ( or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $1,157,196.
As of September 30, 1997, the aggregate market value of the issuer's common
stock, $.001 par value, held by nonaffiliates of the issuer, is $1,831,446
computed based upon bid and ask quotes averaging $.08 per share. No active
trading market exists.
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TABLE OF CONTENTS
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PART I
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Item 1 Description of Business.................................................... 3-7
Item 2 Description of Property.................................................... 7
Item 3 Legal Proceedings.......................................................... 7-8
Item 4 Submission of Matters to a Vote of Security Holders........................ 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters................... 8
Item 6 Management's Discussion and Analysis of Plan of Operations................ 9-12
Item 7 Financial Statements....................................................... 13-29
Item 8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.................................... 30
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.................................... 31-32
Item 10 Executive Compensation..................................................... 33
Item 11 Security Ownership of Certain Beneficial Owners and Management............. 34-35
Item 12 Certain Relationships and Related Transactions............................. 36
Item 13 Exhibits, Lists and Reports on Form 8-K.................................... 37-38
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
---------------------
Entourage International, Inc. ("Entourage" or "the Company") is a
Texas corporation which commenced operations in 1984.
The Company's most significant operations involve the sale of
Biozhem Skin Care Products, formerly Biogime Skin Care, which it
distributes through a network of retail stores. The Company enters into
marketing and distribution agreements with manufacturers of specific
products or product lines and resells those products through company-owned
retail stores and licensed or franchised retail stores.
On December 21, 1995, the Company transferred its 100% common
interest in Biogime International, Inc. "Biogime", a wholly owned
subsidiary, to certain shareholders of Entourage in exchange for 1,050,000
shares of Entourage common stock. Biogime marketed skin care, health and
nutritional products through a network of independent distributors.
On January 31, 1997, the Company, through a wholly owned subsidiary,
BFS Acquisition Corp. "BAC", entered into an agreement and plan of merger
with the shareholders of Biogime Franchise Services USA, Inc. (BFS), a
company owned by an Officer/Director of the Company, whereby BFS was merged
into BAC. As a result of the merger, BAC acquired all of the assets of BFS
amounting to $273,895 and assumed all of the liabilities of BFS amounting
to $184,700. The assets included a $175,000 promissory note payable by the
Company to BFS which was due on demand. Following the merger, this
indebtedness was canceled. The merger consideration consisted of 7,500,000
shares of common stock issued to the shareholders of BFS valued at
$300,000. In connection with the acquisition, the Company recorded $210,805
in goodwill.
On July 1, 1997, the Company acquired the assets of two retail stores
from a franchisee for consideration of $107,155, consisting of a promissory
note in the amount of $49,095, forgiveness of liabilities due to the
Company of $55,060 and assumption of liabilities in the amount of $3,000.
The note bears interest at of 8% per annum with principal and interest
payments due from July 15, 1997 through July 15, 2000.
On December 5, 1997, the Company entered into a Settlement
Agreement and Mutual Release of All Claims with the franchisee of the
Atlanta, Georgia store, closed in April 1997. In consideration, the Company
issued the franchisee a $59,855 non-interest bearing note and warrant to
purchase 85,000 shares of the Company's common stock for $.08 per share.
Business of Issuer
------------------
A. PRODUCTS
The company markets Biozhem skin care products.
Biozhem Skin Care Products: The Company's primary products are a
--------------------------
series of skin care formulations marketed and sold using the name Biozhem.
Sales in the Biozhem product line consist
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primarily of the five-step "Woman's Skin Care System". This five-step process is
specially formulated to clean and condition the skin. The formulation consists
of all natural ingredients and the Company has eliminated certain ingredients
which are known to be damaging to the skin. The Biogime name was used for the
fifteen months following the December 21, 1995 transfer of the direct sales
division, after which the name "biozhem" was used by Entourage. (See notes to
financial statements)
B. DISTRIBUTION
At September 30, 1997 Biozhem skin care products are marketed
through seven Company-owned retail stores and three franchised and licensed
retail stores. Products were also marketed through a network of independent
distributors and twelve licensees outside the United States prior to December
21, 1995.
(1) Company -owned Retail Stores
----------------------------
During fiscal 1997, the Company operated seven Company-owned
retail stores under the name Biogime Skin Care Center. Sales through Company-
owned retail stores were 86% and 82% of total sales in the fiscal years ended
September 30, 1997 and 1996 respectively. The locations with opening and closing
dates (during the current and previous fiscal years) of the Company-owned and
operated retail stores as of September 30, 1996 were:
Dallas, Texas (March 1991)
Phoenix, Arizona (March 1992)
Denver, Colorado (March 1993)
Santa Ana, California (February 1997)
San Diego, California (February 1997)
Tulsa, Oklahoma (July 1997)
Oklahoma City, Oklahoma (July 1997)
San Jose, California (March 1993) (Closed September 1997)
Tampa, Florida (April 1993) (Closed September 1997)
Chicago (Oakbrook), Illinois (September 1993) (Closed September 1996)
The San Jose, Santa Ana, San Diego, Tulsa and Oklahoma City
stores were acquired from franchisees; the other stores were opened by the
Company.
Management evaluated the profitability of all its retail stores
and closed the unprofitable stores in Chicago in September of 1996 and Tampa in
September of 1997. These stores had shown losses since its opening. The Company
will continue to evaluate the profitability and continued operations of the
other retail stores. The San Jose store was closed at the end of its lease and
is being relocated to a large regional mall.
(2) Franchised and Licensed Retail Stores
-------------------------------------
Biozhem products have been distributed through three and eight
franchised and licensed retail stores under the Biozhem Skin Care Center name
through September 30, 1997 and 1996, respectively. Their operations were the
responsibility of BFS until January 31, 1997, when BFS was acquired by the
Company. These retail stores are located in Kentucky, Nevada and Hawaii. During
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1997 the Company acquired the Santa Ana and San Diego franchises from BFS as
well as purchasing the Tulsa and Oklahoma City franchises from Hogan, Inc. The
Atlanta franchise closed April 1997.
Sales to franchised and licensed retail stores and or sales to BFS
through January 31, 1997 were 14% and 18% of total sales for the fiscal years
ended September 30, 1997 and 1996, respectively.
(3) Direct Sales Through Independent Distributor Network
----------------------------------------------------
The direct sales division was discontinued in connection with the
December 21, 1995 transfer of the Company's interest in Biogime International,
Inc. to certain shareholders. Prior to the discontinuance, the direct sales
division sold Biogime products to independent distributors for resale to their
customers and to persons recruited and trained, as down-line distributors.
Direct sales through the independent distributor network amounted to $315,602
for the period from October 1, 1995 to December 21, 1995.
(4) International Export Operations
--------------------------------
International export sales were also discontinued in connection with
the transfer of the Company's interest in Biogime International, Inc. to certain
shareholders.
Prior to the discontinuance, the Company had licensees in Sweden,
Guatemala, New Zealand, Korea, Norway, Denmark, Malaysia/Singapore, Hong Kong,
Spain, El Salvador, Thailand and Mexico. The Company considered international
licensee opportunities as long-term and devoted few of its resources to this
division.
C. COMPETITION
Entourage competes with a large number of companies and product lines
in the states in which its products are sold. Many competitive companies are
well established and have research, financial and manufacturing capabilities and
other resources substantially greater than those of Entourage. Retail
competition consists of major cosmetic companies such as Estee Lauder, Clinique
and Lancome and national retailers such as Body Shop and Garden Botanica.
Entourage has developed extensive training materials to acquaint
retail store employees with effective sales techniques and the various aspects
of the Company's products. In addition, the Company offers fewer products than
those of its national competitors, and its retail store employees therefore
focus on the sale of fewer types of products or product lines. As a result, the
Company believes its retail store employees have a greater knowledge and
understanding of the Company's products which permits a more thorough and
effective sales presentation from the retail store employee to the customer.
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D. SUPPLIERS
The Company has an agreement with Arizona Natural Resources, Inc.
("ANR"), whereby ANR produces for Entourage a series of skin care formulations
known as Biozhem. By agreement, ANR is committed to supervise the manufacture
(including, without limitation, the bottling and packaging) of the multi-step
skin care formulations and other related skin care products, and to produce and
deliver to the Company the full requirements of the Company with respect to
those products. Entourage is required to pay ANR an amount per bottle ordered,
as stipulated in the agreements, and all shipping and delivery costs. The
agreement does not contain provisions which would require the Company to
purchase minimum volumes thereunder. This agreement is currently contracted on a
month-to-month basis.
The Company maintains its inventory at a warehouse in San Juan
Capistrano, California. Additionally, small amounts of inventory are stocked at
the Company-owned retail stores. Inventory is financed through internally-
generated funds, its working capital line of credit and credit extended from
ANR. The majority of the inventory is sold for cash. Merchandise is shipped
directly from the San Juan Capistrano, California warehouse to distributors or
retail stores.
The Company extends a 90-day return policy which permits distributors and
retail customers to return merchandise on an initial order in exchange for cash
(less a restocking charge) or replacement merchandise.
E. PATENTS, TRADEMARKS AND COPYRIGHTS
The Company utilizes no patents or copyrights in connection with any of
its operations. The Company operates under a trademark registration for
"Entourage". The trademarks "Biogime" and "Biogime Skin Care Center" were being
used in the United States until March 21, 1997. The service marks, trade name
Biogime, the design logo and the three Federal trade-mark registrations relating
to Biogime were transferred to Biogime in the December 21, 1995, transfer of the
Company's interest in Biogime to certain shareholders. As part of this
agreement, a consent agreement was signed by the Company and Biogime allowing
the Company to use the Biozhem mark concurrently with Biogime's use of the
Biogime marks. A service mark application was filed on May 27, 1997 for
Biozhem's "Advanced Skin Care Solutions". Trade name and trade mark applications
were also filed on May 27, 1997, for Biozhem, Biozhem Skin Basics, Biozhem Body
Basics and Colour Concepts by Biozhem. The Company seeks to protect its
proprietary interests in its products by applying for patents, trademarks and/or
copyrights as circumstances warrant.
F. GOVERNMENT REGULATIONS
(1) Products
--------
Certain federal agencies regulate, among other things, the purity and
packaging of cosmetic products. Similar regulations are in effect in various
states. Manufacturers and distributors of cosmetic products are also subject to
the jurisdiction of the Federal Trade Commission with respect to such matters as
advertising content and other trade practices. The Company has entered into
private cosmetics labeling agreements only with non affiliated manufacturers
that manufacture products in a manner which complies with such regulations and
who have submitted or intend to submit their
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products periodically to independent laboratories for testing. However, the
extent of potentially adverse governmental regulations which might arise
from future legislation or administrative action cannot be predicted.
(2) Direct-to-Consumer Marketing
----------------------------
Direct-to-consumer marketing programs are subject to regulation
by various governmental regulatory agencies. On the state level, such
programs may be subject to regulation under various statutes governing
business opportunities, franchises, consumer protection, multi-level
distribution programs, securities and pyramid schemes. On the federal
level, direct-to-consumer marketing programs may be regulated by the
Federal Trade Commission as franchises, and by the United States Post
Office through lottery and fraud statutes. Both civil and criminal
penalties are imposed for violations of these state and federal statutes,
and many provide for private rights of action by individual claimants.
G. EMPLOYEES AND CONSULTANTS
Entourage employs 11 full-time and 13 part-time persons, one of
whom is an officer and director of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 2,400 square feet of office and warehouse
space within a business park setting in San Juan Capistrano, California.
The Company also leases retail space for each Company-owned retail center
which it operates as a Biozhem Skin Care Center in the various locations.
Generally, retail stores are located in small, upscale shopping centers
with 700 to 1,000 square feet of space each. The total lease commitments
are $205,000, $154,000, $130,000, $85,000 and $28,000 in fiscal years 1998,
1999, 2000, 2001 and 2002, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company was sued on June 14, 1996, by Biogime International,
Inc. (the Plaintiff) in the United States District Court for the Southern
District of Texas, Houston, Texas, for damages related to alleged breaches
of the master transaction agreement and the standstill agreement signed in
December 1995. The Plaintiff claimed damages in the amount of at least
$100,000 for the Company's alleged failure to make required payments due
April 5, 1996, May 5, 1996, and June 6, 1996, under the master transaction
agreement and for the Company's failure to pay for legal fees called for in
the agreement. The plaintiff also claimed that the Company had violated the
standstill agreement by advertising in areas prohibited under the agreement
and requested that the Company be enjoined from further breaches of the
agreement. Attorney fees and court costs were also claimed in the suit by
the Plaintiffs. On November 20, 1996, a release and settlement agreement
was signed by the Company and the Plaintiff settling all claims and causes
of action that the companies had or in the future could have that were in
any way connected with the agreements. As a result of the settlement
agreement, the Company paid a one time amount to Biogime International,
Inc. of $20,000 and the plaintiff agreed to comply with certain competitive
restrictions. The plaintiff also agreed to provide certain documents and
signatures called for in the previous agreements. On February 18, 1997, an
agreed order of dismissal with prejudice was filed in the District Court
Harris County, Texas, 61st Judicial District.
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.
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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 1997 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Historically, the Company's common stock was traded in the over-
the-counter market of NASDAQ under the symbol "ENTG". On January 23,
1991, the Company was notified that its stock was delisted from the NASDAQ
system because of the limited number of firms making a market for the
Entourage stock under the NASDAQ system. Though there is still a limited
market in the Company's common stock, there have been sporadic bid prices
quoted during fiscal year 1997. The following table sets forth the high
and low bid prices of Entourage common stock for the periods shown.
Information on December, March and June quarters is not available.
QUARTER ENDED BID PRICES
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LOW HIGH
September 30, 1997 $.08 $.18
September 30, 1996 .02 .06
The above quotations reflect inter-dealer prices, without retail
mark-up, markdowns or commission, and may not necessarily reflect actual
transactions.
As of September 30, 1997, there were approximately 600 record
holders of the Company's common stock.
Entourage has paid no dividends on its common stock and has no
present plans to do so. Entourage's Board of Directors intends to retain
earnings, if any, to finance the growth and development of the business of
Entourage. Any payment of cash dividends in the future will be at the
discretion of the Board of Directors and will depend upon the financial
condition, capital requirements and earnings, if any, of Entourage, as well
as other factors which the Board of Directors may deem relevant.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
PLAN OF OPERATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Investors are cautioned that such forward-looking statements
involve risks and uncertainties including without limitation the following:
(i) the Company's plans, strategies, objectives, expectations and
intentions are subject to change at any time at the discretion of the
Company; (ii) the Company's plans and results of operations will be
affected by the Company's ability to manage its growth and inventory; (iii)
the Company's business is highly competitive and the entrance of new
competitors into or the expansion of the operations by existing competitors
in the Company's markets and other operations in the retail climate could
adversely affect the Company's plans and results of operations; and (iv)
other risks and uncertainties indicated from time to time in the Company's
filings with the Securities and Exchange Commission.
General
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In December 1994, the Company acquired from Petrolon (the Seller)
certain assets of a product line marketed using the name "Swipe" for
$300,000 and received from the Seller, a working capital loan in the amount
of $250,000. A convertible note in the principal amount of $550,000 was
issued in exchange for the product line and working capital advance. In
December 1995, the convertible note and related accrued interest were
canceled in exchange for 300 shares of the preferred stock of Biogime
International, Inc. held by the Company. An extraordinary gain of $543,000
was recognized on the debt extinguishment.
On December 21, 1995, the Company entered into an agreement to
transfer 100% of the common stock of Biogime International, Inc. (BII), a
wholly owned subsidiary that operated as the Company's direct sales
division, to certain Entourage shareholders in exchange for 1,050,000
shares of Entourage common stock. Mutual non-competition agreements for a
period of five years were executed and an agreement was reached between the
parties allowing Entourage to use the secondary mark and logo "Biozhem" in
connection with the operation of its business. No gain or loss was
recognized on the transfer.
As a result of the transfer, Entourage's operations consist
principally of marketing skin care products through its traditional retail
channels which include retail stores. BII, an unrelated entity, markets
skin care products and health and nutritional products through independent
distributors in the United States and directly markets such products
internationally.
BII's results of operations have been classified as discontinued
operations for the year ended September 30, 1996 presented in the
accompanying financial statements. Following is summarized financial
information for BII for the year ended September 30, 1996.
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1996
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Net sales $ 315,602
Gross profit $ 170,137
Net loss $ (66,374)
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The Company was sued by BII on June 14, 1996 for damages related
to alleged breaches of certain agreements signed on December 21, 1995. A
settlement was reached on November 20, 1996 under which the Company paid
$20,000 to BII.
The Company closed one of its stores in September 1996. The closure
resulted in a charge of $27,000 for the write-off of leasehold improvements
and other assets, inventory, settlement of lease commitments, severance
payments and related legal fees. Net sales from the store were less than
$67,000 in 1996.
The Company closed two of its retail stores in September 1997. The
closure resulted in a charge of $16,000 for the write-off of leasehold
improvements and other assets, inventory, settlement of lease commitments,
severance payments and related legal fees. One retail store was closed at
the end of its lease period and is being relocated to a large regional mall.
The other retail store was closed permanently. The net sales for the
permanently closed location were less than $50,000 and $90,000 in 1997 and
1996, respectively.
On January 31, 1997, the Company, through a wholly owned subsidiary,
entered into an agreement and plan of merger with the shareholders of
Biogime Franchise Services USA, Inc. (BFS), a company owned by an
Officer/Director of the Company. As a result of the merger, the Company
acquired all of the assets of BFS, amounting to $273,895, and assumed all
the liabilities of BFS, amounting to $184,700. Following the merger, this
indebtedness was canceled. The merger consideration consisted of 7,500,000
shares of common stock issued to the shareholders of BFS.
The merger was accounted for as a purchase and, accordingly, the
operations of BFS have been included in the consolidation statement of
operations beginning February 1, 1997. Goodwill arising from the transaction
amounted to $210,805 and is being amortized on a straight line basis over 10
years.
On July 1, 1997, the Company acquired the assets of two retail stores
from a franchisee for consideration of $107,155, consisting of a promissory
note in the amount of $49,095, forgiveness of liabilities due to the Company
of $55,060 and assumption of liabilities in the amount of $3,000. The note
bears interest at of 8% per annum with principal and interest payments due
from July 15, 1997 through July 15, 2000.
The acquisition was accounted for as a purchase. Accordingly, the
purchase consideration was allocated to the acquired assets on the basis of
estimated fair value and the operations of the retail stores acquired are
included in the consolidated statement of operations beginning July 1, 1997.
Goodwill, a covenant not to compete and customer list of $50,155, $20,000,
and $15,000, respectively, were recorded in correction with this
transaction. (Note 4)
On December 5, 1997, the Company entered into a Settlement Agreement
and Mutual Release of All Claims with the franchisee of the Atlanta, Georgia
store, closed in April 1997. In consideration, the Company issued the
franchisee a $59,855 non-interest bearing note and warrant to purchase
85,000 shares of the Company's common stock for $.08 per share.
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LIQUIDITY
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The Company has experienced severe liquidity shortages beginning
in August 1994. A lack of growth in direct sales, lower than anticipated
retail sales and profitability due to limited marketing and the need for a
new infomercial and legal expenses incurred in connection with the BII
transfer contributed to the deterioration of the Company's liquidity and
capital position. Current liabilities exceeded current assets by $135,918
and $539,784 at September 30, 1997 and September 30, 1996, respectively. In
addition, cash balances were $0 at September 30, 1997 and 1996.
In connection with the disposal of the discontinued operations,
trade payables and debt of approximately $272,000 and $200,000 respectively,
were assumed by Biogime (BII) in 1996. Subsequent to the disposal, Biogime
Franchise Services (BFS), a related party, loaned the Company approximately
$200,000. The loan was subordinate to certain vendor financing, bore
interest at 8% per annum and was due on demand. $175,000 of the indebtedness
was canceled in connection with the Company's acquisition of BFS in January
1997.
During 1997, the Company issued 7,500,000 shares of the Company's
common stock, valued at $300,000, in connection with the acquisition of BFS.
In addition, the Company raised $410,000 through a private placement sale of
8,650,000 shares of the Company's common stock.
On January 30, 1997, the Company issued a total of 2,867,500 shares of
common stock as follows: 375,000 shares were issued in lieu of a cash
payment for unpaid director fees totaling $15,000 accrued from December 31,
1995 to November 30, 1996; 348,750 shares were issued in lieu of a cash
payment to a director, for unpaid financial consulting services totaling
$13,950 accrued from April 1995 through November 1996; 1,143,750 shares were
issued in lieu of a cash payment to Iamco Financial Corp., a company owned
by a director, for unpaid corporate consulting and advisory services
totaling $45,750 accrued from April 1995 through November 1996; 1,000,000
shares were awarded an officer/director as a bonus for the accomplishment of
specific activities totaling $40,000; 200,000 shares were issued in lieu of
cash payments for legal fees totaling $10,000.
On September 1, 1997, the Company obtained a $50,000 operating line
of credit, against which there were no borrowings as of September 30, 1997.
However the Company must still rely primarily on operating cash flow and
cash management to sustain its operations. The Company's 1998 operating plan
contemplates improved operating results and cash flow. Subsequent to year
end, the Company has completed no additional equity financings but is
actively pursuing additional financing sources. If management cannot achieve
its 1998 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 believes that the cash generated from operating
activities, trade credit and available bank borrowings will be sufficient to
fund its operations for the next twelve months, however, there can be no
assurance that this will be the case. See "Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995."
OPERATIONS -- 1997 COMPARED TO 1996
-----------------------------------
Entourage incurred a loss from continuing operations of $190,744 in
1997 compared to a loss from continuing operations of $298,644 in 1996. The
1996 loss included legal and consulting expenses of approximately $167,315
related to the disposition of Biogime International, Inc.
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Net sales in 1997 decreased by $22,066 or 2% as compared to 1996 due
to limited advertising and the need for a new infomercial. The Company
closed two retail stores and acquired four franchise locations in 1997,
which reflects the impact of an increase in retail sales of approximately
$36,000, offset by a decrease in franchise sales of approximately $58,000.
Average monthly sales per Company owned store remained constant at $13,000
in 1997 and 1996. Company owned stores accounted for 86% and 82% of total
net sales in 1997 and 1996, respectively. Franchised and licensed stores
accounted for 14% and 18% of total net sales in 1997 and 1996, respectively.
Gross profit in 1997 decreased by $28,842 or 3% as compared to the
corresponding amount for 1996. Gross profit as a percentage of net sales
decreased slightly to 82% in 1997 from 83% in 1996. Gross profit as a
percentage of net sales at Company owned stores was 85% and 86.5% in 1997
and 1996, respectively, and 62% and 67.8%, respectively, for sales to
franchise stores.
Selling, general and administrative expenses decreased by $100,156 or
8%, in 1997 as compared to 1996 due primarily to a non recurring $100,000
non-compete expense resulting from the disposal of Biogime International,
Inc. in 1996.
Depreciation and amortization decreased in 1997 by $12,628 as compared
to 1996. The decrease was due primarily to the closure of two retail stores
in 1997.
Interest expense decreased by $18,706 in 1997 as compared to 1996. The
decrease was due primarily to the forgiveness of $175,000 promissory note
payable to BFS (Note 2).
At September 30, 1996, the Company had a federal net operating loss
carryforward of approximately $3,700,000. If not used to offset future
taxable income, these loss carryforwards will expire between 2002 and 2012.
Pursuant to the Tax Reform Act of 1986, use of the Company's net operating
loss carryforwards may be substantially limited if a cumulative change in
ownership of more than 50% occurs within a prescribed testing period.
Equity transactions in 1996 and 1997 may have resulted in such a change and
would likely result in a limitation of the amount of net operating loss
that may be used annually. Further, the limitation may render a substantial
portion of the Company's net operating loss carryforwards unusable.
Based on numerous factors but not limited to the Company's historical
losses, management believes that it cannot demonstrate that it is more
likely than not that it will fully realize all of the benefits of deferred
tax assets existing at September 30, 1997. Accordingly, a valuation
allowance has been provided for the full amount of the Company's deferred
tax assets.
YEAR 2000
---------
The Company is aware of the issue associated with the programming code
in existing computer systems as the year 2000 approaches. The "year 2000"
problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize data
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause
a system to fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram and test the systems for the year 2000
compliance. To date, confirmations have been received from the Company's
primary processing vendor that plans are being developed to address
processing of transactions in the year 2000. Management has not yet
assessed the year 2000 compliance expense and related potential affect on
the Company's earnings.
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Item 7: Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors...................................... 14
Balance Sheets--September 30, 1997 and 1996......................... 15
Statements of Operations--Years ended September 30, 1997 and 1996... 16
Statements of Stockholders' Equity (Deficit)--Years ended
September 30, 1997 and 1996....................................... 17
Statements of Cash Flows--Years ended September 30, 1997 and 1996... 18
Notes to Financial Statements....................................... 19-28
</TABLE>
13
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Entourage International, Inc.
We have audited the accompanying balance sheets of Entourage International, Inc.
as of September 30, 1997 and 1996 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the management of Entourage
International, Inc. Our responsibility is to express an opinion on these
financial statements based on our 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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entourage International, Inc.
at September 30, 1997 and 1996 and the results of its operations and its 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 more fully disclosed in Note 1 to
the financial statements, the Company's recurring operating losses and working
capital and stockholders' equity deficiencies raise substantial doubt about its
ability to continue as a going concern. Management's plans as to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Ernst & Young LLP
Orange County, California
November 14, 1997, except note 12 as to which
the date is December 5, 1997
14
<PAGE>
Entourage International, Inc.
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-----------------------------------------
Assets
Current assets:
<S> <C> <C>
Trade accounts receivable $ 9,377 $ 11,080
Inventory 77,302 51,485
Prepaid expenses and other current assets 2,122 1,256
-----------------------------------------
Total current assets 88,801 63,821
Property and equipment, net 77,493 30,177
Intangible assets, net 277,725 -
Other assets 26,110 11,724
-----------------------------------------
$ 470,129 $ 105,722
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 112,795 $ 325,460
Notes payable 86,609 278,145
Current portion of long-term debt 25,315 -
-----------------------------------------
Total current liabilities 224,719 603,605
Long-term debt 99,337 -
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized shares 25,000,000
Issued and outstanding shares - 22,893,074 and
3,675,574 at September 30, 1997 and 1996, respectively 22,893 3,675
Additional paid-in capital 3,797,592 2,982,110
Accumulated deficit (3,674,412) (3,483,668)
-----------------------------------------
Total stockholders' equity (deficit) 146,073 (497,883)
-----------------------------------------
$ 470,129 $ 105,722
=========================================
</TABLE>
See accompanying notes.
15
<PAGE>
Entourage International, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
---------------------------------------
<S> <C> <C>
Net sales $1,157,196 $1,179,262
Cost of sales 209,601 202,825
---------------------------------------
Gross profit 947,595 976,437
Expenses:
Selling, general and administrative 1,081,280 1,181,436
Depreciation 25,683 49,615
Amortization 18,489 7,185
---------------------------------------
Total operating expenses 1,125,452 1,238,236
---------------------------------------
Operating loss (177,857) (261,799)
Interest expense (17,539) (36,245)
Other income 4,652 -
---------------------------------------
Loss from continuing operations before extraordinary gain (190,744) (298,044)
Loss from discontinued operations, net of taxes - (66,374)
---------------------------------------
Loss before extraordinary gain (190,744) (364,418)
Extraordinary gain on debt extinguishment, net of taxes - 543,000
---------------------------------------
Net income (loss) $ (190,744) $ 178,582
=======================================
PER COMMON AND COMMON EQUIVALENT SHARE
Loss from continuing operations before extraordinary gain $ (.01) $ (.09)
=======================================
Extraordinary gain on debt extinguishment $ - $ .14
=======================================
Net income (loss) $ (.01) $ .05
=======================================
</TABLE>
See accompanying notes.
16
<PAGE>
Entourage International, Inc.
Statements of Stockholders' Equity (Deficit)
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Total
Common stock Additional Treasury stock stockholders'
------------------------- paid-in Accumulated ------------------------- equity
Shares Amount capital (deficit) Shares Amount (deficit)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 5,520,101 $ 5,520 $3,076,689 $(3,662,250) (794,527) $(96,424) $(676,465)
Shares acquired from exchanging - - - - (1,050,000) - -
shareholders (Note 2)
Treasury shares retired (1,844,527) (1,845) (94,579) - 1,844,527 96,424 -
Net income - - - 178,582 - - 178,582
-------------------------------------------------------------------------------------------------
Balance at September 30, 1996 3,675,574 3,675 2,982,110 (3,483,668) - - (497,883)
Common stock issued 19,217,500 19,218 815,482 - - 834,700
Net loss - - - (190,744) - - (190,744)
-------------------------------------------------------------------------------------------------
Balance at September 30, 1997 22,893,074 $22,893 $3,797,592 $(3,674,412) - - $ 146,073
-------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
17
<PAGE>
Entourage International, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
-----------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income $(190,744) $ 178,582
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary gain on debt extinguishment - (543,000)
Depreciation and amortization 44,172 63,813
Loss on disposals of property and equipment 3,816 -
Common stock and notes issued in lieu of cash for
accrued expenses 124,700 72,269
Changes in operating assets and liabilities (net of the
effects of disposal of discontinued operations):
Trade accounts receivable (4,568) (17,572)
Inventory (20,554) (67,821)
Prepaid expenses and other (9,058) (3,745)
Accounts payable and accrued liabilities (236,315) 245,663
-----------------------------------
Net cash used in operating activities (288,551) (71,811)
INVESTING ACTIVITIES
Purchases of property and equipment, net of effects of
acquisitions (11,059) (12,210)
Acquisitions (8,362) -
Cash of discontinued operations - (113,987)
-----------------------------------
Net cash used in investing activities (19,421) (126,197)
FINANCING ACTIVITIES
Common stock issued 410,000 -
Proceeds from borrowing 131,205 201,123
Repayment of long-term debt (233,233) (36,520)
-----------------------------------
Net cash provided by financing activities 307,972 164,603
-----------------------------------
Net decrease in cash - (33,405)
Cash at beginning of year - 33,405
-----------------------------------
Cash at end of year $ - $ -
===================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 17,539 $ 36,245
===================================
===================================
Shares issued for acquisition $ 300,000 $ -
===================================
Debt issued for acquisition $ 49,095 $ -
===================================
</TABLE>
See accompanying notes.
18
<PAGE>
Entourage International, Inc.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Entourage International, Inc. (the Company) markets and distributes consumer
products (primarily skin care products) through retail stores which are Company-
owned or operated by franchisees in Texas, California, Colorado, Florida,
Georgia, Illinois, Nevada, Hawaii and Oklahoma.
During 1997, as described further in (Note 2), the Company acquired four retail
stores from franchisees.
BASIS OF PRESENTATION
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company reported a loss
from operations of $190,744 and has a working capital deficiency of $135,918.
The Company's continued existence is dependent upon its ability to achieve its
1998 operating plan, which contemplates significantly improved operating results
and cash flow and to obtain additional financing. Since September 30, 1997, the
Company has received no additional equity financing.
If management cannot achieve the 1998 operating plan because of sales shortfalls
or other unfavorable events, the Company may find it necessary to further reduce
expenses or undertake other actions as may be appropriate.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Sales to franchisees are recorded when products are shipped. Sales by Company-
owned retail stores are recorded when sold to a retail customer. Provisions are
made for estimated returns and allowances at the time of sale.
At September 30, 1996 substantially all of the accounts receivable were from
Biogime Franchise Services, Inc. (BFS) (Notes 6 and 8), an affiliated company.
Credit risk is considered by management to be minimal.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
19
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued )
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory consists mainly of skin care products which are stated at the lower of
cost or market using the first-in, first-out method. The Company purchases a
majority of its inventory from one vendor. These items are readily available
from other vendors. However, a change in supplier could cause delays in product
delivery and possible losses in revenue which could adversely affect operating
results.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which range
from three to five years.
INTANGIBLE ASSETS
Intangible assets consist of covenants not to compete, customer lists and
goodwill arising from business combinations (Note 2) and are amortized on a
straight-line basis. The covenants are amortized over the contractual term of 3
years. The customer lists are amortized over the expected benefit of 3 years.
Goodwill, representing the excess of the purchase price over the estimated fair
market value of the net assets of the acquired business, is amortized over the
period of expected benefit of 10 years. The carrying value for goodwill is
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as determined based upon
discounted cash flows of the entity acquired over the remaining amortization
period, the carrying value of the goodwill is reduced to estimated full value.
LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, trade accounts receivable, accounts payable and notes
payable approximate cost due to the short period of time to maturity.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs amounted to
$28,165 and $147,206 in 1997 and 1996, respectively.
INCOME TAXES
The Company provides for income taxes under the liability method. Accordingly,
deferred tax assets and liabilities are computed for differences between the
financial statement carrying amounts and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation
20
<PAGE>
Entourage International, Inc.
Notes to Financial Statements ( continued )
allowances are established when necessary to reduce deferred tax assets to
amounts which are more likely than not to be realized. The provision for taxes
represents the tax payable or refundable for the period plus or minus the charge
during period in deferred assets and liabilities.
PER SHARE AMOUNTS
Per share amounts are computed by dividing the applicable operating statement
caption amount by the weighted average number of common and dilutive common
equivalent shares outstanding during the respective periods. Common equivalent
shares consist primarily of stock options and have been excluded from the
computation of weighted average shares because their effect would be
antidilutive in each of the respective years. Weighted average shares
outstanding amounted to 13,981,177 in 1997 and 3,908,588 in 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted by the Company on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute per share amounts and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of primary and fully diluted per share amounts for
the periods presented herein is not expected to be material.
STOCK BASED COMPENSATION
The Company grants to employees stock options for a fixed number of shares with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25) and, accordingly,
recognizes no compensation expense for the stock option grants. However, the
Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS No.
123).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 130, Reporting Comprehensive Income, effective for fiscal years beginning
------------------------------
after December 15, 1997, which establishes standards for the reporting and
- -----------------------
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by owners and distributions to owners.
The Company will adopt the new standards in 1999 and does not expect the impact
on the financial statement presentation to be significant.
In June 1997, the FASB issued Statement No. 131 (SFAS 131), Disclosures About
-----------------
Segments of an Enterprise and Related Information, effective for fiscal years
- -------------------------------------------------
beginning after December 15, 1997, which establishes standards for the way that
-----------------------
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographical areas and major customers. The Company will adopt the new standards
retroactively in 1999. Management has not completed its review of SFAS 131.
21
<PAGE>
Entourage International, Inc.
Notes to Financial Statements ( continued )
2. ACQUISITIONS, DISPOSITIONS AND OTHER
In December 1994, the Company acquired from Petrolon (the Seller) certain assets
of a product line marketed using the name "Swipe" for $300,000 and received from
the seller, a working capital loan in the amount of $250,000. A convertible note
in the principal amount of $550,000 was issued in exchange for the product line
and working capital advance. Entourage also granted the seller warrants to
purchase 10,000 shares of common stock for $.10 per share. The warrants were
canceled in December 1995. In December 1995, the convertible note was canceled
in exchange for 300 shares of preferred stock of Biogime International, Inc.
(Biogime), a wholly owned subsidiary, resulting in an extraordinary gain on debt
extinguishment of $543,000.
On December 21, 1995, the Company transferred its 100% common interest in
Biogime to certain shareholders of Entourage in exchange for 1,050,000 shares of
Entourage common stock. Biogime marketed skin care, health and nutritional
products through independent distributors. No gain or loss was recognized on the
disposal. Biogime's results of operations have been classified as discontinued
operations for all periods presented. Net revenues of the discontinued
operations were $315,602 and $987,232, in 1996 and 1995, respectively. Interest
expense was allocated to discontinued operations on the basis of pro rata
revenues and amounted to approximately $24,000 in 1995.
On January 31, 1997, the Company, through a wholly owned subsidiary, BFS
Acquisition Corp., ("BAC"), entered into an agreement and plan of merger with
the share-holders of Biogime Franchise Services (USA), Inc., ("BFS"), whereby
BFS was merged into BAC. (Note 8)
As a result of the merger, BAC acquired all the assets of BFS amounting to
$273,895 and assumed all of the liabilities of BFS in the amount of $184,701.
The assets included a $175,000 promissory note payable by the Company to BFS
which was due on demand. Following the merger, this indebtedness was canceled.
The merger consideration consisted of 7,500,000 shares of common stock issued to
the shareholders of BFS.
The value of the merger consideration as determined by trading prices and
quotations for the Company's common stock at the time of the merger was
approximately $300,000, which represented the business judgment of the Company's
Board of Directors as to the fair value of BFS. Factors considered by the Board
of Directors were the revenue, earnings and cash flow from the activities
engaged in by BFS utilizing the assets acquired by the Company in this
transaction and the related financial condition, liquidity and operating results
of the Company.
The merger was accounted for as a purchase and, accordingly, the operations of
BFS have been included in the consolidated statement of operations beginning
February 1, 1997. Goodwill arising from the transaction amounted to $210,805 and
is being amortized on a straight line basis over 10 years.
22
<PAGE>
Entourage International, Inc.
Notes to Financial Statements ( continued )
On July 1, 1997, the Company acquired the assets of two retail stores from a
franchisee for consideration of $107,155, consisting of a promissory note in the
amount of $49,095, forgiveness of liabilities due to the Company of $55,060 and
assumption of liabilities in the amount of $3,000. The note bears interest at
8% per annum with principal and interest payments due from July 15, 1997 through
July 15, 2000.
The acquisition was accounted for as a purchase. Accordingly, the purchase
consideration was allocated to the acquired assets on the basis of estimated
fair value and the operations of the retail stores acquired are included in the
consolidated statement of operations beginning July 1, 1997. Goodwill, a
covenant not to compete and customer list of $50,155, $20,000, and $15,000,
respectively, were recorded in correction with this transaction. (Note 4)
The proforma results of operations for 1997 and 1996, assuming BFS and the
acquired franchised retail stores had been acquired as of the beginning of the
respective years, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-------------------------------------
<S> <C> <C>
Revenue $1,436,849 $1,772,411
Net loss before extraordinary gain (141,441) (264,403)
Net income (loss) after extraordinary gain (141,441) 275,597
Loss per share before extraordinary gain (.01) (.07)
Earnings (loss) per share after extraordinary gain (.01) .07
</TABLE>
The Company closed one of its retail stores in September 1996. The closure
resulted in a charge of $27,000 for the write-off of leasehold improvements and
other assets, inventory, settlement of lease commitments, severance payments and
related legal fees. Net sales from the store were less than $67,000 in 1996.
The Company closed two of its retail stores in September 1997. The closures
resulted in a charge of $16,000 for the write-off of leasehold improvements and
other assets, inventory, settlements of lease commitments, severance payments
and related legal fees. One store was closed at the end of its lease period and
is being relocated to a large regional mall. The other store was closed
permanently. The net sales for the permanently closed location were less than
$50,000 and $90,000 in 1997 and 1996, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
SEPTEMBER 30 USEFUL LIVES
1997 1996 (IN YEARS)
-------------------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements $ 91,332 $ 141,905 3
Equipment 106,385 53,249 3
Software 28,188 28,188 5
------------------------------------
225,905 223,342
Accumulated depreciation (148,412) (193,165)
------------------------------------
$ 77,493 $ 30,177
====================================
</TABLE>
23
<PAGE>
Entourage International, Inc.
Notes to Financial Statements (continued )
4. INTANGIBLE ASSETS
Intangibles assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------------------
<S> <C> <C>
Goodwill $260,960 $ 13,785
Customer lists 15,000 -
Covenant not-to-compete 20,000 45,000
--------------------------------
295,960 58,785
Accumulated amortization (18,235) (58,785)
--------------------------------
$277,725 $ -
--------------------------------
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------------------------
<S> <C> <C>
Accounts payable $ 77,979 $186,615
Accrued commissions -
Accrued expenses 18,270 123,730
Other 16,546 15,115
--------------------------------------
Total $112,795 $325,460
======================================
</TABLE>
Accounts payable at September 30, 1997 and 1996 include outstanding checks in
excess of bank balances of $12,248 and $20,771, respectively.
24
<PAGE>
Entourage International, Inc.
Note to Financial Statements ( continued )
6. NOTES PAYABLE AND LINE OF CREDIT
Notes payable consist of the following at September 30,
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Subordinated note payable to Biogime Franchise Services, Inc., (Notes
2 and 8) interest at 8%, collateralized by the Company's assets
and due on demand 200,876
Note payable to vendor, interest payable monthly form April 15 to
September 15, 1996, principal and interest payable monthly from
October 15, 1996 through March 15, 1997, collateralized by the
Company's assets - 55,000
Note payable to vendor - 15,000
Note payable to JCR Advertising (Note 8), interest at 8%, principal
and interest payable monthly from February 15, 1997 through
January 15, 1998, collateralized by the Company's assets 6,504 -
Notes to various shareholders, interest at 10%, principal and 73,592
interest are due on demand.
Other 6,513 7,269
--------------------------------
$86,609 $278,145
================================
</TABLE>
On September 1, 1997, the Company obtained a $50,000 operating line of credit.
The line of credit carries an interest rate of prime plus 2 1/2 % and matures
September 1, 1998. The balance owed at September 30, 1997 was zero.
25
<PAGE>
Entourage International, Inc.,
Notes to Financial Statements ( continued )
7. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1997 :
<TABLE>
<S> <C>
Note payable to bank, interest at prime plus 3 1/2 %, principal $ 29,167
payments of $833 plus interest are due through August 15, 2000
Note payable to seller of franchised retail stores (Note 2),
interest at 8%, principal and interest payments of $750 payable
from July 15, 1997 through August 15, 1997, principal and interest
payments of $1,538 payable monthly from September 15, 1997 through
July 15, 2000 46,797
Subordinated note payable to JCR Advertising (Note 8), interest at
8% collateralized by the Company's assets and due on demand 48,688
-----------------
124,652
Less current portion 25,315
-----------------
$ 99,337
=================
</TABLE>
Principal maturities are $25,315, $75,313 and $24,024 for the years ending
September 30, 1998, 1999 and 2000, respectively.
8. RELATED PARTY TRANSACTIONS
Prior to January 31, 1997 the Company contracted with Biogime Franchise Services
(BFS) (Notes 2 and 6), a company owned by an officer/director of the Company, to
provide franchise services. Certain agreements between the Company and BFS
provided to BFS a sub-license to use certain trade marks, software, other
copyrighted materials and a franchise information system in order to further
develop the franchise program. BFS purchased from the Company all product
requirements for the franchise locations, based on an agreed upon pricing
schedule. Until its merger with the Company on January 31, 1997, sales to BFS
amounted to $79,645 and $214,000 for the year ended September 30, 1997 and 1996,
respectively. Trade accounts receivable at September 30, 1996 included $8,900
due from BFS. The Company also contracted in 1996 with BFS for certain
advertising and promotional services which amounted to $47,331.
The Company subleases a portion of its corporate office space to JCR Advertising
(JCR), a company owned by an officer/director. The Company received sublease
income of $14,360 for the twelve months ended September 30, 1997.
26
<PAGE>
Entourage International, Inc.
Notes to Financial Statements ( continued )
9. INCOME TAXES
Following is a reconciliation of federal income taxes computed at the statutory
rate of 34% to income tax expense as reported.
<TABLE>
<CAPTION>
1997 1996
---------------------------------------
<S> <C> <C>
Expected income tax benefit at 34% $(64,900) $(101,300)
Change in valuation allowance 64,800 (81,200)
Net operating loss recognized on extraordinary gain - 184,600
Net benefit attributable to discontinued operations - (2,100)
Other 100 -
---------------------------------------
Income tax expense $ - $ -
=======================================
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-----------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 1,233,300 $ 1,160,400
Depreciation and amortization 4,000 16,200
Intangibles 14,100 12,600
Accruals 2,000 5,600
Other, net - 3,600
-----------------------------------------
1,253,400 1,198,400
Less valuation allowance (1,253,400) (1,198,400)
-----------------------------------------
Net deferred taxes $ - $ -
=========================================
</TABLE>
Based on numerous factors, including but not limited to the Company's historical
losses, management believes that it cannot currently demonstrate that it is more
likely than not that it will fully realize all of the benefits of deferred tax
assets existing at September 30, 1997. Accordingly, a valuation allowance has
been provided for the full amount of the Company's deferred tax assets.
At September 30, 1997, the Company had a federal net operating loss carryforward
of approximately $3,600,000. If not used to offset future income, these loss
carryforwards will expire between 2002 and 2012. Pursuant to the Tax Reform Act
of 1986, use of the Company's net operating loss carryforwards may be
substantially limited if a cumulative change in ownership of more than 50%
occurs within a prescribed testing period. Equity transactions in 1996 and 1997
may have resulted in such a change and would likely result in a limitation of
the amount of net operating loss that may be used annually. Further, the
limitation may render a substantial portion of the Company's net operating loss
carryforward unusable.
27
<PAGE>
Entourage International, Inc.
Notes to Financial Statements ( continued )
10. Stockholders' Equity
The Company has a qualified Incentive Stock Option Plan (the Plan) under which
it may grant options to purchase up to 105,000 shares of common stock on a
discretionary basis to key employees, including officers and directors.
The exercise price of options granted under the ISOP may not be less than 100%
of the fair market value of the underlying shares of common stock on the day the
option is granted, except that, with respect to options granted to persons
owning more than 10% of the common stock of Entourage, the option price must be
at least 110% of the fair market value of the common stock on the date of grant.
All options must be exercised within ten years of the date of grant, except
that, with respect to options granted to persons owning more than 10% of the
stock of Entourage, the options must be exercised within five years of the date
of grant.
On January 30, 1997, the Company issued a total of 2,867,500 shares of common
stock as follows: 375,000 shares were issued in lieu of a cash payment for
unpaid director fees totaling $15,000 accrued from December 31, 1995 to November
30, 1996; 348,750 shares were issued in lieu of a cash payment to a director,
for unpaid financial consulting services totaling $13,950 accrued from April
1995 through November 1996; 1,143,750 shares were issued in lieu of a cash
payment to Iamco Financial Corp., a company owned by a director, for unpaid
corporate consulting and advisory services totaling $45,750 accrued from April
1995 through November 1996 and 1,000,000 shares were awarded an officer/director
as a bonus for the accomplishment of specific activities totaling $40,000, on
June 23, 1997, 200,000 shares of common stock were issued in lieu of cash
payments for legal fees totaling $10,000.
Pro forma disclosures as required by SFAS No. 123 have not been presented
because no stock options were granted or outstanding during the periods
presented.
28
<PAGE>
Entourage International, Inc.
Notes to Financial Statements ( continued )
11. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases office and warehouse space in San Juan Capistrano,
California, and retail space in each city in which it has a retail store. Rent
expense in 1997 and 1996 was approximately $177,000 and $193,000, respectively,
and future commitments are approximately $205,000, $154,000 , $130,000, $85,000
and $28,000 in 1998, 1999, 2000, 2001, and 2002, respectively. During 1995, the
Company also leased office and warehouse space in Houston, Texas. The Houston
lease was terminated in January 1996 in connection with the discontinued
operations (Note 2).
LITIGATION
The Company was sued on June 14, 1996, by Biogime International, Inc. (Note 2)
for damages related to alleged breaches of the master transaction agreement and
the standstill agreement signed in December 1995. On November 20, 1996, a
settlement was reached and the Company paid Biogime $20,000.
The Company is subject to other claims arising from normal business operations.
Management believes that losses arising from these claims, if any, will not have
a material adverse effect on the Company's financial position or results of
operations.
EMPLOYEE BENEFITS
The Company has a group medical plan which provides medical and hospital
benefits and term life insurance to its employees, including officers. This
coverage is provided at no cost to the employee, and the Company partially pays
the dependent coverage. The cost of group medical was approximately $15,295 and
$30,500 in 1997 and 1996, respectively.
12. SUBSEQUENT EVENTS
On December 5, 1997, the company executed a settlement agreement with the
owners, one of which is a director of the Company, of a closed franchise
location. Pursuant to the agreement, the company acquired the franchise
customer database in exchange for the issuance of a non-interest bearing
promissory note in the amount of $59,855 and a warrant to purchase 85,000 shares
of the company's common stock for $.08 per share. The note is due in 30 monthly
installments of $1,995 from January 1998 through June 2000 and the warrant is
exercisable at anytime prior to its expiration on December 5, 2000.
13. FOURTH QUARTER ADJUSTMENTS
Adjustments were made in the fourth quarter of 1997 to accrue expenses totaling
$43,000. Adjustments were make in the fourth quarter of 1996 to accrue expenses
totaling $69,000 and to recognize the extraordinary gain on debt extinguishment
of $543,000 (Note 2).
29
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On June 11, 1997, KPMG Peat Marwick, LLP, previously the principal
accountant for the Company, was dismissed and on June 16, 1997, Ernst &
Young was engaged as principal accountants. The decision to change
accountants was approved by the Board of Directors.
In connection with the audits of the two fiscal years ended September, 30,
1995, and the subsequent interim period through June 11, 1997, there were no
disagreements with KPMG Peat Marwick, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to
the subject matter of the disagreement.
30
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
Director
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
John C. Riemann 57 Chairman 1991
Warren L. Hernand 61 Director 1995
Stan R. Wylie 55 Director 1995
Paul A. Reyff Sr 68 Director 1995
Alan Goldsberry 45 Director 1995
</TABLE>
John C. Riemann has been a director of Entourage since June of 1991, and was
- ---------------
Executive Vice President of Entourage from October 1991 to May 1994. In December
1995, he was elected Chairman, CEO and President of the Company. Mr. Riemann is
President and founder of Biogime Franchise Services, Inc., a company formed in
1994. Mr. Riemann was president of J.C.R. Enterprises which included two
Biogime franchise retail locations from 1987 to 1996.
Warren L. Hernand was a director of Entourage from 1991-1993, and has been a
- -----------------
director since 1995. He is currently a financial consultant for IAMCO Financial
Corporation, a financial services company that he has owned since 1982.
Stan R. Wylie has been a director of Entourage since December 1995. Since March
- -------------
1995 he has been a self employed financial consultant. Mr. Wylie was employed
from 1992 to 1995 by several related technology companies located in Houston and
Dallas areas. Mr. Wylie was Chief Financial Officer of Entourage from 1986 to
1991.
Paul A. Reyff Sr. has been a director of Entourage since August 1996. Mr. Reyff
- -----------------
is a retired Navy captain currently employed by the Office of the Secretary of
Defense as a Business and Industry Specialist. He has been Chief Executive
Officer of New England Investment Company 1979-1994.
Alan Goldsberry has been a director of Entourage since December 1995. Mr.
- ---------------
Goldsberry is the founder of Allied Waste Industries, Inc. a NASDAQ listed
company. After resigning in 1992, Mr. Goldsberry pursued a variety of business
ventures and currently advises executive management teams of fast growth
companies. Mr. Goldsberry is president of a recently formed investment company
for identifying and acquiring stock in emerging public companies.
31
<PAGE>
Board of Directors Meetings and Compensation
- --------------------------------------------
During the fiscal year ended September 30, 1997, the Board of Directors
held three meetings. All Board members attended all meetings held, either in
person or by telephone. The Directors also took actions by unanimous consent on
five occasions.
The Company paid each of its Directors - directors fees of $3,000 for the
fiscal year ending September 30, 1996. In lieu of cash payments, the Directors
agreed to an issuance of 75,000 shares of the Company stock valued at $.04 per
share.
Nominating Committee - this committee recommends candidates for the Board of
- --------------------
Directors and is comprised of Mr. Riemann and Mr. Hernand.
Acquisition Committee - this committee evaluates acquisition proposals and
- ----------------------
makes recommendations to the Board of Directors. The Acquisition Committee is
comprised of Mr. Riemann, Mr. Hernand and Mr. Wylie.
32
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
CASH AND CASH EQUIVALENT COMPENSATION
The following table and notes thereto set forth the aggregate of all cash
and cash equivalent compensation paid with respect to each of the two fiscal
years ended September 30, 1997 to each of the most highly compensated officers:
ALL OTHER
PRINCIPAL COMPEN-
NAME POSITION(S) YEAR SALARY BONUS SATION **
- ---- ----------- ---- ------ ----- ---------
1997
John C. Riemann President/CEO 1997 $ 100,000 $ 0 $ 43,000
(since December 1995)
1996
John C. Riemann President/CEO 1996 $ 74,997 $ 0 $ 0
** On January 30, 1997, CEO John Riemann was awarded 1,000,000 shares of the
Company's common stock, valued at $.04 per share, for restructuring
accomplishments during the period April 1995 through November 1996. An
additional 75,000 shares of the Company's common stock valued at $.04 per share
were issued in lieu of a cash payment for director's fees accrued but not paid
as of September 30, 1996.
COMPENSATION ARRANGEMENTS
Mr. Riemann's annual salary as Chairman, CEO and President of the Company
is $100,000. The Company has no employment agreement with Mr. Riemann.
Entourage has a group medical plan which provides medical and hospital
benefits and term life insurance to its employees, including its officers. This
coverage is provided at no cost to the employee and Entourage partially pays the
dependent coverage.
33
<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, 1997, regarding beneficial ownership of the Common Stock by each
person who is known by Entourage to own beneficially more than 5% of its Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF TOTAL NUMBER PERCENT OF
NAME AND ADDRESS SHARES OTHER SHARES OF TOTAL SHARES CLASS
OF BENEFICIAL OWNED OF OWNED OWNED BENEFICIALLY
OWNER RECORD BENEFICIALLY BENEFICIALLY (A) OWNED
- ----------------------------------- --------- ------------ ---------------- -------------
<S> <C> <C> <C> <C>
John C. Riemann 3,217,534 0 3,217,534 14.1%
c/o Entourage International Inc.
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Brian P. Burns 2,600,000 0 2,600,000 11.4%
100 Bush Street, Ste. 1250
San Francisco, CA 94104
Paul A. Reyff Sr 1,405,026 0 1,405,026 6.5%
36 Cove Court
Napa, CA 94559
Paul A. Reyff Jr. 1,505,029 0 1,505,029 6.6%
210 Atherton Ave.
Atherton, CA 94027
Warren L. Hernand 1,268,750 0 1,268,750 5.5%
33 Baypoint Village Dr.
San Rafael, CA 94901
Michael Sabo 1,250,000 0 1,250,000 5.4%
1301 Spring Street, Ste. 5B
Seattle, WA 98104
</TABLE>
(a) Unless otherwise indicated, all securities listed in this table are owned
beneficially and of record by the persons indicated, who possess sole
voting and investment powers as to such securities, subject to community
property laws where applicable. The data concerning beneficial ownership
is based upon information furnished by the persons named above (unless the
person has not responded to requests for information) and contained in the
Company's records.
34
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The table set forth below contains certain information, as of
September 30, 1997, regarding beneficial ownership of equity securities of
Entourage by each of the Directors and Executive Officers and by all of the
Directors and Executive Officers as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES APPROX.
NAME OF TITLE BENEFICIALLY PERCENT
BENEFICIAL OWNER OF CLASS OWNED (A) OF CLASS
- -------------------------------------------- -------- ------------ --------
<S> <C> <C> <C>
John C. Riemann, Director/CEO Common 3,217,534 14.1%
c/o Entourage International Inc.
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Warren L. Hernand, Director Common 1,268,750 5.5%
33 Baypoint Village Dr.
San Rafael, CA 94901
Stan R. Wylie, Director Common 481,031 2.1%
15306 Quiet Creek.
Houston, TX 77095
Paul A. Reyff Sr. , Director Common 1,405,026 (b) 6.5%
36 Cove Court
Napa, CA 94559
Alan Goldsberry, Director Common 107,550 .05%
3245 Able Court
Murrietta, GA 30062
Directors, and Common 6,479,891 28.7%
Executive Officers as a Group (5 persons)
</TABLE>
(a) Unless otherwise indicated, all securities in the table are owned
beneficially and of record by the persons indicated, who possess sole
voting and investment powers as to such securities, subject to community
property laws where applicable. The data concerning beneficial ownership
is based upon information furnished by the persons named above and
contained in Entourage's records.
(b) Includes 85,000 shares held by New England Investment Co., Inc.
STOCK TRANSACTIONS INVOLVING MANAGEMENT
None of the directors was, during the past year, a party to any
contract, arrangement or understanding with any person with respect to any
securities of Entourage, including but not limited to, joint ventures, loan or
option arrangements, puts or calls, guarantees against loss or guarantees of
profit, division of losses or profits, or the giving or withholding of proxies,
other than described herein.
35
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended September 30, 1997, 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 Riemann,
Hernand, Wylie, Reyff, and Goldsberry or members of their immediate families,
had a direct or indirect material interest (and any proposed transactions of a
similar type):
PREVIOUS DIRECTORS DAVIS, WHITWORTH, GOODMAN AND MARTIN These Directors
- -------------------------------------------------------
exchanged all Entourage common stock held by them in the December 21, 1995,
asset and liabilities transfer of the direct sales division. After this
transaction, these individuals held no common shares or options for common
stock.
MR. RIEMANN. On January 31, 1997 the Company acquired all of the assets of
- ------------
Biogime Franchise Services (USA), Inc. ("BFS")in the amount of $362,452 and
assumed all the liabilities of BFS in the amount of $184,701. The assets
included a $175,000 promissory note executed by the Company payable to BFS which
was due on demand. Following the acquisition, this indebtedness was canceled. As
consideration for the transaction, the Company issued 7,500,000 shares of its
common stock to the shareholders of BFS (Note 2). Mr. Riemann received 1,637,534
shares of the Company's common stock for his stock in BFS. Two adult children
of Mr. Riemann received an aggregate of 2,587,399 shares of the Company's common
stock for their stock in BFS. Mr. Riemann was awarded 1,000,000 shares of common
stock as a bonus for the accomplishment of specific activities.
MR. REYFF Mr. Reyff, a director, received 1,250,026 shares of the Company's
- ---------
common stock for his stock in BFS. An adult son of Mr. Reyff received 1,400,029
shares of the Company's common stock for his stock in BFS.
36
<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
--- -----------
3.1 Articles of Incorporation of Entourage International, Inc. and
amendments thereto ( incorporated by reference to Exhibit No.
3.1 to Amendment No l to Registrant's Registration Statement of
Form S-18, filed January 16, 1986, File No. 2-99726-FW).
3.2 Bylaws of Entourage International, Inc. incorporated by
reference to Exhibit No. 3.2 of Registrant's Registration
Statement on Form S-18, filed August 16, 1985, File No. 2-99726-
FW.
4.1 Specimen Common Stock Certificate of Entourage International,
Inc., incorporated by reference to Exhibit No. 4.01 of
Registrant's Annual Report on form 10-K for the year ended
September 30, 1989, File No. 1-9206.
10.1 Amended Qualified Incentive Stock Option Plan for Entourage
International, Inc. incorporated by reference to Exhibit No.
10.26 of the registrant's Annual report of Form 10-K for the
year ended September 1992, file No. 1-9206.
10.2 Amended Qualified Stock Option Plan for Entourage International,
Inc. incorporated by reference to Exhibit No. 10-26 of the
registrant's Annual report of Form 10-K for the year ended 1992,
File No. I-9206.
10.3 Amended Non-qualified Stock Option Plan for Entourage
International, Inc., incorporated by reference to Exhibit No.
10-27 of the Registrant's Annual Report on Form 10-K or the year
ended September 1992, File No. 1-9206.
10.4 License Agreement between Entourage International, Inc. and
Biogime Franchise Services (USA), Inc. dated May 2, 1994.
10.5 Biogime Products Supply and Distribution Agreement between
Entourage International, Inc. and Biogime Franchise Services
(USA), Inc. dated May 2, 1994.
37
<PAGE>
10.6 Assignment and Assumption Agreement between Entourage
International, Inc. and Biogime Franchise Services (USA), Inc.
dated May 2, 1994.
10.7 Services Agreement between Entourage International, Inc. and
Gage Research & Development Institute, Inc. dated July 12, 1994.
10.8 Settlement and Release Agreement between Entourage
International, Inc. and John Southwell dated November 1, 1994.
10.9 Asset Purchase Agreement between Entourage International, Inc.
and Diamond Falcon Corporation dated December 29, 1994.
10.10 Master Transaction Agreement incorporated by reference to form
8-K filed on January 4, 1996.
21.1 Subsidiary of Registrant
Copies of this document are available at no cost from Entourage
International, Inc., 32240 Paseo Adelanto, Suite A, San Juan Capistrano,
CA 92675.
38
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
ENTOURAGE INTERNATIONAL, INC.
By: /s/ John C. Riemann
--------------------
John C. Riemann, Chief Executive Officer
Date: April 16, 1998
--------------
By: /s/ John C. Riemann
----------------------
John C. Riemann
Director
Date: April 16, 1998
--------------
By: /s/ Paul A. Reyff Sr.
------------------------
Paul A. Reyff, Sr.
Director
Date: April 16, 1998
--------------
By: /s/ Warren L. Hernand
------------------------
Warren L. Hernand
Director
Date: April 16, 1998
--------------
By: /s/ Alan Goldsberry
---------------------
Alan Goldsberry
Director
Date: April 16, 1998
--------------
By: /S/ Stan W. Wyley
--------------------
Stan W. Wyley
Director
Date: April 16, 1998
--------------
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 9,377
<ALLOWANCES> 0
<INVENTORY> 77,302
<CURRENT-ASSETS> 88,801
<PP&E> 225,905
<DEPRECIATION> 148,412
<TOTAL-ASSETS> 470,129
<CURRENT-LIABILITIES> 224,719
<BONDS> 0
22,893
0
<COMMON> 0
<OTHER-SE> 123,180
<TOTAL-LIABILITY-AND-EQUITY> 470,129
<SALES> 1,157,196
<TOTAL-REVENUES> 1,161,848
<CGS> 209,601
<TOTAL-COSTS> 1,290,881
<OTHER-EXPENSES> 44,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,539
<INCOME-PRETAX> (190,744)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (190,744)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
</TABLE>
