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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission file number 1-14725
BIOZHEM COSMECEUTICALS, INC.
(Name of Small Business Issuer in its charter)
Texas 76-0118305
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
32238 Paseo Adelanto
Suite A
San Juan Capistrano, CA 92675
- ---------------------------------------- ----------
(Address of Principal executive offices) (Zip Code)
Issuer's telephone number, including area code (949) 488-2184
--------------
Securities registered pursuant to section 12(b) of act: None
Securities registered pursuant to section 12 (g) of act: None
Common stock $.001 par value.
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 registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
As of February 8, 2000, there were 8,113,389 shares outstanding of the
issuer's common stock, $.001 par value.
1
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BIOZHEM COSMECEUTICALS, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Index to Condensed Financial Statements
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Page
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Condensed Balance Sheets
December 31, 1999 and September 30, 1999 3
Condensed Statements of Operations
For the Three Months Ended December 31, 1999
and December 31, 1998 4
Condensed Statements of Cash Flows
For the Three Months Ended December 31, 1999
and December 31, 1998 5
Notes to be Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-10
PART II - OTHER INFORMATION 11
2
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BIOZHEM COSMECEUTICALS, INC.
CONDENSED BALANCE SHEETS
ASSETS
December 31 September 30
1999 1999
------------ ------------
Current Assets:
Cash $ 44,417 $ -
Trade accounts receivable, net 4,302 1,347
Inventory 87,522 59,862
Other current assets 2,451 3,268
------------ ------------
Total current assets 138,692 64,477
Property and equipment, net 42,153 47,758
Intangible assets, net 302,419 316,441
Other assets 22,195 23,350
------------ ------------
Total Assets 505,459 452,026
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 216,000 $ 201,396
Notes payable 235,949 59,355
Current portion of long-term debt 36,599 69,675
------------ ------------
488,548 330,426
Long-term debt 40,321 30,811
Stockholders' Equity
Preferred stock, $.001 par value; 10,000,000 shares
authorized; no shares issued and outstanding
Common stock, $.001 par value; 100,000,000 shares
authorized; 8,113,389 and 7,985,548 shares
issued and outstanding at December 1999
and September 1999, respectively 8,113 7,985
Common stock subscribed $.001 par value
118,046 committed as of December 1999 118 118
and September 1999, respectively
Additional paid-in capital 5,406,453 5,340,081
Accumulated deficit (5,438,094) (5,257,395)
------------ ------------
Total stockholders' equity (23,410) 90,789
Total Liabilities and Stockholders' Equity $ 505,459 $ 452,026
============ ============
The accompanying notes are an integral part of the financial statements.
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BIOZHEM COSMECEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Three
Months Months
Ended Ended
December 31 December 31
1999 1998
------------ ------------
Net sales $ 217,268 $ 271,265
Cost of sales 50,939 51,460
------------ ------------
Gross Margin 166,329 219,805
Expenses:
Selling and G&A 313,534 290,646
Advertising 14,394 13,027
Depreciation and amortization 19,628 16,830
------------ ------------
Total expenses 347,556 320,503
------------ ------------
Operating loss (181,227) (100,698)
Interest expense (1,172) (6,780)
Other income (expense) 1,700 -
------------ ------------
Loss from operations (180,699) (107,478)
============ ============
Income tax expense - -
Net loss (180,699) (107,478)
============ ============
Net loss per common share (.03) (.02)
============ ============
The accompanying notes are an integral part of the financial statements.
4
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BIOZHEM COSMECEUTICALS, INC.
CONDENSED STATEMENT OF CASH FLOWS
Three Three
Months Months
Ended Ended
December 31 December 31
1999 1998
------------ ------------
Net cash provided by (used in)
operating activities $ (175,111) $ (80,769)
Net cash provided by (used in)
investing activities (-) (1,837)
Net cash provided by (used in)
financing activities 219,528 82,606
------------ ------------
Net increase (decrease) in cash 44,417 -
Cash at beginning of period - -
Cash at end of period $ 44,417 $ -
============ ============
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BIOZHEM COSMECEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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 of 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 from time to time in the Company's filings with
the Securities and Exchange Commission.
INTERIM FINANCIAL STATEMENTS The accompanying financial statements have been
prepared in accordance with the instructions to quarterly reports on Form
10-QSB. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and changes in cash flows at December 31, 1999 and for all
periods presented have been made. Certain information and footnote data
necessary for fair presentation of financial position and results of operations
in conformity with generally accepted accounting principals have been condensed
or omitted. It is therefore suggested that these statements be read in
conjunction with the summary of significant accounting policies and notes to
financial statements included in the Company's annual Form 10-KSB. The results
of operations for the period ended December 31, 1999, are not necessarily
indicative of operating results for the full year.
GENERAL 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 connection with this transaction.
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 17,000 shares of the Company's
common stock for $.40 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.
On January 15, 1999, the Company acquired the assets of the Louisville, Kentucky
retail store from a franchisee for consideration of $80,750, consisting of a
promissory note in the amount of $65,000 and 35,000 shares of common stock
valued at $15,750. The note bears interest at 8% per annum with principal and
interest payments of $2,037 due from February 15, 1999 through January 15, 2002.
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The acquisition was accounted for as a purchase. Accordingly, the purchase
consideration was allocated to the acquired assets on the basis of estimated
fair market value and the operations of the retail store acquired are included
in the statement of operations beginning January 16, 1999. Goodwill, a covenant
not to compete and customer list of $60,750, $10,000 and $10,000, respectively,
were recorded in connection with the transaction.
MANAGEMENT AGREEMENT
The Company entered into a management agreement in 1999. This Agreement (the
"Agreement") was effective as of July 14, 1999 (the "Effective Date") by and
among One World Network Integrated Technologies, Inc., a Nevada corporation (or
any affiliate thereof) (collectively "OWN"), and the Company. OWN is engaged by
the Company to exclusively provide and perform for and on behalf of the Company
all management services reasonably necessary for the proper and efficient
operation of the Company for a five year period. OWN is exclusively authorized
to provide and perform for and on behalf of the Company all services required of
OWN pursuant to the terms of this Agreement in such a manner as OWN deems
reasonable and appropriate in order to meet the day-to-day requirements of the
Company. In performing such services for the Company, OWN may advance or pay on
the Company's behalf all necessary or appropriate sums pursuant to this
Agreement. OWN may subcontract with other persons to perform any part of the
services required of OWN hereunder. The Company will cooperate with OWN's
business arrangements and will not interfere with OWN's efficient management of
the day-to-day operations of the Company.
OWN is in charge of marketing and distribution activities on behalf of the
Company. OWN shall be responsible for all sales activities including determining
which products to market, selling prices, target customers, selecting
distribution methods and procedures and advertising activities. In the event OWN
identifies new products to be distributed by, through, or on behalf of the
Company, OWN shall be entitled to an additional fee equal to twenty five percent
of the actual cost of the products in addition to any other fees payable to OWN
hereunder.
OWN is entitled to a reimbursement, which shall be calculated and paid on a
monthly basis. The reimbursement shall be the sum of OWN's reimbursable
overhead, direct expenses, product development and capital costs. For its
services to the Company and for undertaking all of its obligations hereunder to
the Company, OWN shall be paid on a monthly basis a management fee, which may be
paid on an estimated basis. The management fee shall mean a fee of 40% of
pre-tax net income, if any, for each year during the five year term.
On the closing date and continuing thereafter, the Company will issue to OWN
warrants, which warrants will contain cashless exercise provisions and
protection against stock split/reverses and will have a term of five years from
their respective date of issuance. The Warrants will be issued as follows:
(i) 1,000,000 Class A Warrants to purchase one share of Company's
common stock at an exercise price of $.70 or the average of the
closing price as quoted on the principal exchange for which the
Company's shares trade for the five (5) day period immediately
preceding the date of the execution of this agreement;
(ii) Commencing on the first day of the first calendar month
following the Closing Date, the Company shall calculate on a
monthly basis, Pre-Tax Net Income. For each $400,000 in cumulative
Pre-Tax Net Income that is generated by the Company during the
term, OWN will receive 500,000 Class B Warrants to purchase one
share of the Company's common stock at an exercise price of $1.00
per share, up to a maximum of 22,000,000 Class B Warrants;
7
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(iii) 1,000,000 Class C Warrants to purchase one share of the
Company's common stock at an exercise price of $1.00 upon the
completion during the term of a strategic alliance, endorsement
deal or product acquisition, the result of which, in combination
with other activities of the Company, increase the market
capitalization of the Company by at least $10,000,000, such
determination to be based upon a six (6) month average before and
after said transaction of the daily closing prices as quoted on
the principal exchange for which the Company's shares trade;
(iv) 1,000,000 Class D Warrants to purchase one share of the
Company's common stock at an exercise price of $1.00 upon the
attainment during the term of the first two consecutive quarters
of Pre-Tax Net Income of more than $60,000 per quarter; and
(v) 1,000,000 Class E Warrants to purchase one share of the
Company's common stock at an exercise price of $1.50 per share if
the Company, during any consecutive six (6) month period (or less)
attains gross revenues of at least $8,000,000, provided that no
Class E Warrants shall be issued if the Company does not have
after tax net income from operations during such period; and
provided further, a maximum of 3,000,000 Class E Warrants shall be
issued under this subparagraph.
As of September 30, 1999, the Company has issued 1,000,000 Class A
Warrants to purchase shares of the Company's common stock at $0.56 per
share (see (i) of agreement).
As of September 30, 1999, upon closing of the transaction, OWN made
available to the Company a loan of up to $50,000 to cover operational
cash flow problems. The loan bears interest of 10% for a one-year
period. If the note is not repaid at maturity it may be repaid with
common stock of the Company valued at $.37 per share, with piggyback
registration rights. In addition, OWN shall assist the Company and its
advisors, and on a best efforts basis and on terms to be mutually agreed
upon, in arranging for $200,000 in new equity. The balance on the note
was $42,177 at September 30, 1999.
In October 1999, a multi-party amendment was made to (i) of the
Management Agreement (the "Agreement"), dated as of July 14, 1999. OWN
agreed to increase its capital investment in the Company. In addition to
the sum of $50,000 made available to the Company at the closing, Own
agreed to advance an additional $50,000 so the aggregate amount of the
loan available to the Company is $100,000. On October 13, 1999, OWN
elected to acquire 127,844 shares of the Company's common stock at a
purchase price of $.52 a share, for an aggregate purchase price of
$66,500 in lieu of cash note payments. In consideration for such
investment, the Company has agreed to lower the exercise price of the
remaining 888,666 of Class A Warrants to $.15.
Concurrently with the closing of the transaction on July 14, 1999, Mr.
Hernand and Mr. Reyff, Sr. resigned from the Board of Directors of the
Company. The vacancies created thereby will be filled, as soon as
practicable, by two new outside directors acceptable to OWN and the
remaining directors. At any subsequent time, OWN shall have the right to
designate two (2) additional nominees, and the Company shall be
obligated to cause the directors to increase the size of the Board to
seven members and shall appoint the two persons designated by OWN to
fill the vacancies so created, and such directors shall serve until the
next meeting of shareholders of the Company at which directors are
elected. Upon termination of the Agreement, all directors elected by or
through OWN, if any, will resign effective immediately.
8
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BIOZHEM COSMECEUTICALS, INC.
MANAGEMENT DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company has recently experienced severe liquidity shortages. Principal
contributing factors to the deterioration of the Company's liquidity and capital
position have been the following; lack of growth in direct sales, lower than
anticipated retail sales and profitability due to limited marketing; and the
need for a new infomercial. Current liabilities exceeded current assets by
$349,856 at December 31, 1999, compared to $265,949 at December 31, 1998. In
addition, cash balances were $44,417 at December 31, 1999, compared to $0 at
September 30, 1999.
The Company increased inventory levels slightly from $59,862 to $87,522 during
the quarter ended December 31, 1999 in anticipation of its planned 2000
promotional launch.
Accounts payable and accrued liabilities have been increased from approximately
$201,000 as of September 30, 1999 to $216,000 as of December 31, 1999.
On December 28, 1998, the Company signed a new note with Eldorado Bank, with an
interest rate at prime plus 3%, with terms as follows: interest only through
January 1999, 1 principal payment of $10,000 plus interest on February 1, 1999,
1 principal payment of $15,000 plus interest on March 1, 1999, 1 principal
payment of $15,000 plus interest on April 1, 1999 and a final principal and
interest payment of $9,585.10 on May 1, 1999. The loan with Eldorado Bank was
paid off as agreed.
As of September 30, 1999, upon closing of the transaction, OWN made available to
the Company a loan of up to $50,000 to cover operational cash flow problems. The
loan bears interest of 10% for a one-year period. If the note is not repaid at
maturity it may be repaid with common stock of the Company valued at $.37 per
share, with piggyback registration rights. In addition, OWN shall assist the
Company and its advisors, and on a best efforts basis and on terms to be
mutually agreed upon, in arranging for $200,000 in new equity. The balance on
the note was $42,177 at September 30, 1999.
In October 1999, a multi-party amendment was made to (i) of the Management
Agreement (the "Agreement"), dated as of July 14, 1999. OWN agreed to increase
its capital investment in the Company. In addition to the sum of $50,000 made
available to the Company at the closing, Own agreed to advance an additional
$50,000 so the aggregate amount of the loan available to the Company is
$100,000. On October 13, 1999, OWN elected to acquire 127,844 shares of the
Company's common stock at a purchase price of $.52 a share, for an aggregate
purchase price of $66,500 in lieu of cash note payments. In consideration for
such investment, the Company has agreed to lower the exercise price of the
remaining 888,666 of Class A Warrants to $.15.
On October 13, 1999 the Company entered into a note with a shareholder in the
amount of $100,000, bearing an interest rate of 10%, principal and interest due
and payable on August 1, 2000.
On November 30, 1999, the company entered into a note with a shareholder in the
amount of $100,000, bearing an interest rate of 12%, principal and interest due
and payable on February 29, 2000.
9
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BIOZHEM COSMECEUTICALS, INC.
MANAGEMENT DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company must still rely primarily on operating cash flow and cash management
to sustain its operations. If management cannot achieve its 2000 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's continued existence is dependent upon its ability to achieve its
2000 operating plan, which contemplates significantly improved operating results
and cash flow and its ability to obtain additional financing. There can be no
assurances that the Company will be successful in these regards. See "Safe
Harbor Statement under the Private Securities Litigation Reform Act of 1995."
RESULTS OF OPERATIONS - QUARTER ENDED DECEMBER 31, 1999 COMPARED WITH QUARTER
- -----------------------------------------------------------------------------
ENDED DECEMBER 31, 1998.
- ------------------------
The net loss for the quarter ended December 31, 1999, was $180,699 ($.03 per
share), compared to the net loss of $107,478 ($.02 per share).
Net sales, for operations, for the quarter ended December 31, 1999 were $217,268
compared with net sales of $271,265 for the quarter ended December 31, 1998. The
decrease in net sales was primarily due to the delayed launch of year 1999/2000
promotional program and the closure of the San Diego retail location in November
1999. The location was closed with the intention of relocating to a larger
regional mall. The San Diego retail location had sales decreases of
approximately $10,000 for the three months ended December 1999, down to $11,500
compared to $21,500 for the three months ended December 1998. The Company will
continue to evaluate the profitability and continued operations of the retail
stores.
Gross margin was 77% for the quarter ended December 31, 1999 and 81% for the
quarter ended December 31, 1998. The decrease was due primarily to additional
promotional discounts offered at the retail level as well as higher product
costs during the three months ended December 31, 1999.
Operating expenses for the quarter ended December 31, 1999 increased by
approximately $27,000 to $348,000 compared with about $321,000 for the quarter
ended December 31, 1998. Accounting and professional expenses increased
approximately $6,000 to $9,000 for the three months ended December 1999 compared
to $3,000 for the three months ended December 1998. Consulting fees were
approximately $4,000 for the three months ended December 1999 compared to $0 for
the three months ended December 1998. Promotion and advertising increased
approximately $11,500 to $25,000 for the three months ended December 1999
compared to $13,500 for the three months ended December 1998. Overall, the
Company believes that current operating expenses are at a minimum level to allow
the Company to improve its sales volume during fiscal year 2000.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There are no significant changes to the information reported
in the Form 10-KSB for the year ended September 30, 1999.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form S-8
--------------------------------
( a ) Exhibits
--------
Exhibit 27 - Financial Data Schedule
( b ) Reports on Form S-8
-------------------
Stock registration statement for Consulting Agreement
with International Media Solutions, Inc. January 7,
1999
11
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOZHEM COSMECEUTICALS, INC.
----------------------------
(Registrant)
Date: February 09, 2000 By: /s/ John C. Riemann
--------------------
John C. Riemann
Chief Executive Officer
(Responsible Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 44,417
<SECURITIES> 0
<RECEIVABLES> 4,302
<ALLOWANCES> 0
<INVENTORY> 87,522
<CURRENT-ASSETS> 138,692
<PP&E> 244,695
<DEPRECIATION> 202,542
<TOTAL-ASSETS> 505,459
<CURRENT-LIABILITIES> 488,548
<BONDS> 0
0
0
<COMMON> 8,231
<OTHER-SE> (23,410)
<TOTAL-LIABILITY-AND-EQUITY> 505,459
<SALES> 217,268
<TOTAL-REVENUES> 218,968
<CGS> 50,939
<TOTAL-COSTS> 364,473
<OTHER-EXPENSES> 34,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,122
<INCOME-PRETAX> (180,699)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,699)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
