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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, 1999
Commission file number 1-14725
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BIOZHEM COSMECEUTICALS, INC.
(Name of Small Business Issuer in its Charter)
Texas 76-0118305
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
32238 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 (949) 488-2184
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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
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(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15 (d) of the Securities Exchange Act of 1934 during the past 12
months ( or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $1,073,963.
As of September 30, 1999, the aggregate market value of the issuer's
common stock, $.001 par value, held by nonaffiliates of the issuer, is
$2,954,652 computed based upon bid and ask quotes averaging $.37 per share. A
limited trading market exists.
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TABLE OF CONTENTS
PART I
Item 1 Description of Business ..........................................3-6
Item 2 Description of Property.............................................6
Item 3 Legal Proceedings...................................................6
Item 4 Submission of Matters to a Vote of Security Holders................ 6
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.......... 7
Item 6 Management's Discussion and Analysis of Plan of Operations......7-11
Item 7 Financial Statements............................................12-31
Item 8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure......................31
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act....... 32-33
Item 10 Executive Compensation............................................ 33
Item 11 Security Ownership of Certain Beneficial Owners and Management..34-35
Item 12 Certain Relationships and Related Transactions.................... 35
Item 13 Exhibits, Lists and Reports on Form 8-K........................... 36
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
Business Development
--------------------
Biozhem Cosmeceuticals, Inc. ("Biozhem" or "the Company"), formerly
known as Entourage International, Inc., 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 Company owned retail stores and one licensed
retail store. 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 one
licensed retail store.
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 1,500,000 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 8% per annum with
principal and interest payments due monthly 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 17,000 shares of the Company's common stock for $0.40 per
share.
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 due from February 15,
1999 through January 15, 2002.
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 Networks 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. See Item 6 for a more complete description of the Agreement.
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Business of Issuer
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A. PRODUCTS
The Company markets Biozhem skin care products.
BIOZHEM SKIN CARE PRODUCTS: The Company's primary products are a series
of skin care formulations marketed and sold using the name Biozhem.
Sales in the Biozhem product line consist primarily of the five-step
"Woman's Skin Care System". This five-step process is specially
formulated to clean and condition the skin. The formulation consists of
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.
B. DISTRIBUTION
At September 30, 1999, Biozhem skin care products are marketed through
seven Company-owned retail stores and one licensed retail store.
(1) Company - owned Retail Stores
---------------------------------
During fiscal 1999, the Company operated seven Company-owned retail
stores under the name Biozhem Skin Care Center. Sales through
Company-owned retail stores were 98% and 96% of total sales in the
fiscal years ended September 30, 1999 and 1998 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, 1999 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)
Louisville, Kentucky (January 1999)
The San Jose, Santa Ana, San Diego, Tulsa, Oklahoma City and Louisville
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 their
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 with the intention of relocating to a
large regional mall.
(2) Franchised and Licensed Retail Stores
-----------------------------------------
Biozhem products have been distributed through one franchised and one
licensed retail store under the Biozhem Skin Care Center name through
September 30, 1999 and 1998, 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 and Nevada. In
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January 1999, the Company purchased the Kentucky location. During 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 were 2% and 4% of total
sales for the fiscal years ended September 30, 1999 and 1998
respectively.
(3) 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
Biozhem 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
Biozhem. Retail competition consists of major cosmetic companies such
as Estee Lauder, Clinique and Lancome and national retailers such as
Body Shop.
Biozhem 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.
D. SUPPLIERS
The Company has an agreement with Arizona Natural Resources, Inc.
("ANR"), whereby ANR produces for Biozhem 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.
Biozhem 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 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 customers to
return merchandise on an initial order in exchange for cash (less a
restocking charge) or replacement merchandise.
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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
"Biozhem." 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 trademark
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
Products
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Certain federal agencies regulate, among other things, the purity and
packaging of cosmetic products. Similar regulations are in effect in
various states. Manufacturers and distributors of cosmetic products are
also subject to the jurisdiction of the Federal Trade Commission with
respect to such matters as advertising content and other trade
practices. The Company has entered into private cosmetics labeling
agreements only with non affiliated manufacturers that manufacture
products in a manner which complies with such regulations and who have
submitted or intend to submit their products periodically to
independent laboratories for testing. However, the extent of
potentially adverse governmental regulations which might arise from
future legislation or administrative action cannot be predicted.
G. EMPLOYEES AND CONSULTANTS
Biozhem employs 12 full-time and 13 part-time persons, one of whom is
an officer 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 $169,000, $117,000, $83,000, $50,000 and $24,000
in fiscal years 2000, 2001, 2002, 2003 and 2004, respectively.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Historically, the Company's common stock was traded in the
over-the-counter market of NASDAQ under the symbol "ENTG". On January
23, 1991, the Company was notified that its stock was delisted from the
NASDAQ system because 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 now under the symbol
"BZHM", there have been sporadic bid prices quoted during fiscal year
1999. The following table sets forth the high and low bid prices of
Biozhem common stock for the periods shown. Information on the quarters
ended December 31, 1997, March 31, 1998 and June 30, 1998 are not
available.
QUARTER ENDED BID PRICES
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LOW HIGH
September 30, 1998 $.25 $.50
December 31, 1998 $.31 $.69
March 31, 1999 $.37 $.78
June 30, 1999 $.34 $.72
September 30, 1999 $.19 $.56
The above quotations reflect inter-dealer prices, without retail
mark-up, markdowns or commission, and may not necessarily reflect
actual transactions. The above quotations have been adjusted to reflect
the 5 for 1 reverse stock split in August 1998.
As of September 30, 1999, there were approximately 615 record holders
of the Company's common stock.
The Company has paid no dividends on its common stock and has no
present plans to do so. The Company's Board of Directors intends to
retain earnings, if any, to finance the growth and development of the
business of Biozhem. 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
Biozhem, as well as other factors which the Board of Directors may deem
relevant.
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.
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GENERAL
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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.
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.
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.
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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;
(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.
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.
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.
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LIQUIDITY
---------
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 $265,949 at September 30, 1999.
In addition, cash balances were $0 at September 30, 1999.
During 1999, the Company sold 1,181,371 shares of its common stock.
Proceeds to the Company were $370,950, net of offering costs of $77,550.
During 1998, the Company sold or committed 775,652 shares (including
52,319 shares committed to finders) of its common stock. Proceeds to the
Company were $221,448, net of offering costs of $5,502.
In the year ended 1999, the Company committed 14,911 shares of common
stock for $5,517 in debt cancellation and 103,135 shares of common stock
for $27,280 in consulting fees.
On February 15, 1999, the Company issued 35,000 shares as the $15,750
down payment for the purchase of the Kentucky franchise. On June 29,
1999, the Company issued 10,000 shares as a bonus to an employee at a
share price of $.50. Concurrent with the OWN Transaction, on July 15,
1999, the Company issued a total of 528,750 shares of common stock as
follows: 442,540 shares of common stock were issued to shareholders to
convert $163,183 of debt to equity; 86,210 shares of common stock were
issued in lieu of cash payments for consulting fees totaling $28,566;
32,095 shares of common stock were issued in lieu of cash payments for
unpaid directors' fees for a total of $11,875. During the year ended
September 30, 1999, the Company issued a total of 272,629 shares of
common stock in lieu of cash payments for financial public relations for
a total of $124,675. The shares were issued as follows: 66,667 shares of
common stock were issued on November 16, 1998; 87,671 shares of common
stock were issued on January 14, 1999; 63,291 shares of common stock
were issued on February 19, 1999; 35,000 shares of common stock were
issued on March 19, 1999; and 20,000 shares of common stock were issued
on July 1, 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.
The Company must still rely primarily on operating cash flow and cash
management to sustain its operations. The Company's 2000 operating plan
contemplates improved operating results and cash flow. Subsequent to
year end, the Company has completed an additional equity financing of
$66,500 and is actively pursuing additional financing sources. 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."
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OPERATIONS - 1999 COMPARED TO 1998
----------------------------------
Biozhem incurred a net loss of $1,048,601 in 1999 compared to a net
loss of $534,382 in 1998.
Net sales in 1999 decreased $86,794 or 7% compared to sales in 1998.
Average monthly sales per Company owned store dropped to approximately
$12,525 in 1999 compared to $13,000 in 1998. Company owned stores
accounted for 98% and 96% of total net sales in 1999 and 1998,
respectively. Franchised and licensed stores accounted for 2% and 4% of
total net sales in 1999 and 1998, respectively.
Gross profit in 1999 decreased by $83,291 or 9% as compared to the
corresponding amount for 1998, but remained consistent as a percentage
of net sales at 81% in both 1999 and 1998. Gross profit as a percentage
of net sales at Company owned stores was 82% and 82% in 1999 and 1998,
respectively, and 37% and 54%, respectively, for sales to franchise
stores.
Selling, general and administrative expenses increased by $440,498 or
32%, in 1999 as compared to 1998 due to non-cash transactions totaling
$337,051 related to granting 1,947,647 warrants to consultants, other
service providers and shareholders and 262,629 shares of common stock
issued in lieu of cash payments for financial public relations for a
total of $124,675.
Depreciation and amortization increased in 1999 by $8,415 as compared
to 1998. The increase was due primarily to the acquisition of one
retail store in January 1999.
Interest expense decreased by $9,812 in 1999 as compared to 1998. The
decrease was due primarily to the decrease in debt in 1999.
At September 30, 1999, the Company had a federal net operating loss
carryforward of approximately $4,900,000. If not used to offset future
taxable income, these loss carryforwards will expire between 2002 and
2014. 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 the past 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, 1999. Accordingly, a
valuation allowance has been provided for the full amount of the
Company's deferred tax assets.
YEAR 2000
---------
The Company is currently assessing computer hardware and software
difficulties that may be experienced in connection with the so-called
"Year 2000" problems. The Company currently relies upon computer
hardware and software systems from various third party vendors to
manage critical functions of the Company. Internally generated software
systems do not comprise a material element of the Company's information
technology. The Company has secured from third party software and
hardware vendors, including providers of telephone services,
certificates of compliance with Year 2000 issues for currently
installed systems that are material to the Company's operations. At
this time, the Company expects that its key information technology
vendors will be compliant with Year 2000 requirements. A failure by a
third party vendor to adequately address the Year 2000 issue could have
a material adverse effect on the Company. In addition, the magnitude of
certain risks, for example those associated with embedded chips, are
unknown at this point, and could nevertheless have a material adverse
impact on the Company and other companies in its industry.
11
<PAGE>
Item 7: Financial Statements
Reports of Independent Auditors...............................................13
Financial Statements
- --------------------
Balance Sheets as of September 30, 1999 and 1998..............................14
Statements of Operations - Years ended September 30, 1999 and 1998............15
Statements of Stockholders' Equity - Years ended
September 30, 1999 and 1998...............................................16
Statements of Cash Flows - Years ended September 30, 1999 and 1998............17
Notes to Financial Statements..............................................18-31
12
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Biozhem Cosmeceuticals, Inc.
We have audited the accompanying balance sheets of Biozhem Cosmeceuticals, Inc.,
(the Company) as of September 30, 1999 and 1998 and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the management of the Company.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Biozhem Cosmeceuticals, Inc. at
September 30, 1999 and 1998 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 deficiency 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.
Corbin & Wertz
Irvine, California
January 6, 2000
13
<PAGE>
<TABLE>
Biozhem Cosmeceuticals, Inc.
Balance Sheets
<CAPTION>
SEPTEMBER 30,
1999 1998
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Trade accounts receivable $ 1,347 $ 3,002
Inventory 59,862 90,322
Prepaid expenses and other current assets 3,268 5,238
------------------------------------
Total current assets 64,477 98,562
Property and equipment, net 47,758 62,140
Intangible assets, net 316,441 288,598
Other assets 23,350 72,001
------------------------------------
$ 452,026 $ 521,301
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 201,396 $ 212,919
Notes payable and line of credit 59,355 118,069
Current portion of long-term debt 69,675 46,935
------------------------------------
Total current liabilities 330,426 377,923
Long-term debt, less current portion 30,811 93,835
------------------------------------
Total liabilities 361,237 471,758
------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 10,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value; 100,000,000 shares
authorized; 7,985,548 and 4,945,282 shares
issued and outstanding at September 30, 1999 and
1998, respectively 7,985 4,945
Common stock subscribed, $.001 par value; 118,046
and 980,414 shares committed as of September 30,
1999 and 1998, respectively 118 980
Additional paid-in capital 5,340,081 4,252,412
Accumulated deficit (5,257,395) (4,208,794)
------------------------------------
Total stockholders' equity 90,789 49,543
------------------------------------
$ 452,026 $ 521,301
====================================
</TABLE>
SEE INDEPENDENT AUDITORS REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
<TABLE>
Biozhem Cosmeceuticals, Inc.
Statements of Operations
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1999 1998
------------------------------------
<S> <C> <C>
Net sales $ 1,073,963 $ 1,160,757
Cost of sales 219,755 223,258
------------------------------------
Gross profit 854,208 937,499
Expenses:
Selling, general and administrative 1,812,050 1,371,552
Depreciation 23,059 25,465
Amortization 52,907 42,086
------------------------------------
Total operating expenses 1,888,016 1,439,103
------------------------------------
Loss from operations (1,033,808) (501,604)
Interest expense (22,980) (32,792)
Other income 8,187 14
------------------------------------
Net loss $ (1,048,601) $ (534,382)
====================================
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE BASIC
AND DILUTED $ (.17) $ (.12)
====================================
Weighted average number of common shares outstanding 6,307,321 4,593,890
========== ==========
</TABLE>
SEE INDEPENDENT AUDITORS REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
<TABLE>
Biozhem Cosmeceuticals, Inc.
Statements of Shareholders' Equity
Years Ended September 30, 1999 and 1998
<CAPTION>
Additional
Committed Common Paid in Accumulated
Common Stock Stock Capital Deficit Total
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Amount Amount Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at October 1, 1997 4,578,615 $ 4,578 - $ - $3,815,907 $(3,674,412) $ 146,073
Shares sold (including 52,319 shares
committed to finders), net of offering
costs of $5,502 366,667 367 408,985 409 220,672 - 221,448
Shares committed upon conversion of debt - - 463,096 463 161,774 - 162,237
Shares committed for services - - 108,333 108 54,059 - 54,167
Net loss - - - - - (534,382) (534,382)
----------------------------------------------------------------------------------------
Balances at September 30, 1998 4,945,282 4,945 980,414 980 4,252,412 (4,208,794) 49,543
----------------------------------------------------------------------------------------
Shares committed upon conversion of debt - - 14,911 15 5,502 - 5,517
Shares committed for services - - 103,135 103 27,177 - 27,280
Shares sold, net of offering costs of
$77,550 1,181,378 1,181 - - 369,769 - 370,950
Shares issued for purchases of assets 35,000 35 - - 15,715 - 15,750
Shares issued for services 400,934 401 - - 169,715 - 170,116
Conversion of debt to common stock 442,540 443 - - 162,740 - 163,183
Subscribed shares issued 980,414 980 (980,414) (980) - - -
Warrants issued for services - - - - 337,051 - 337,051
Net loss - - - - - (1,048,601) (1,048,601)
----------------------------------------------------------------------------------------
Balances at September 30, 1999 7,985,548 $ 7,985 118,046 $ 118 $5,340,081 $(5,257,395) $ 90,789
========================================================================================
</TABLE>
SEE INDEPENDENT AUDITORS REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
<TABLE>
Biozhem Cosmeceuticals, Inc.
Statements of Cash Flows
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1999 1998
-----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,048,601) $ (534,382)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 75,966 67,551
Common stock committed for services 27,280 54,167
Common stock issued for services 170,116 -
Expense recorded as a result of induced conversion of debt - 34,885
Warrants issued for services 337,051 -
Changes in operating assets and liabilities
Accounts receivable 1,655 4,765
Inventory 30,460 (13,020)
Prepaid expenses and other current assets 1,970 (3,116)
Other assets 48,651 (48,172)
Accounts payable and accrued liabilities (11,523) 100,124
-----------------------------------
Net cash used in operating activities (366,975) (337,199)
-----------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (8,677) (10,112)
-----------------------------------
FINANCING ACTIVITIES
Proceeds from sales of common shares, net of offering costs 370,950 221,448
Proceeds from borrowings 160,379 274,171
Repayment of long-term debt (155,677) (148,308)
-----------------------------------
Net cash provided by financing activities 375,652 347,311
-----------------------------------
Net decrease in cash - -
Cash at beginning of year - -
-----------------------------------
Cash at end of year $ - $ -
===================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 22,980 $ 32,792
===================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of debt into common stock $ 163,183 $ 127,352
===================================
Shares committed for conversion of debt $ 5,517 -
===================================
Issuance of debt for the acquisition of
an intangible $ 65,000 $ 49,067
===================================
Write-off of accounts receivable in connection with
acquisition of asset $ - $ 1,611
===================================
Common stock issued for acquisition of asset $ 15,750 $ -
===================================
</TABLE>
SEE INDEPENDENT AUDITORS REPORTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
1. ORGANIZATION
DESCRIPTION OF THE COMPANY
Biozhem Cosmeceuticals, Inc. (the Company), distributes consumer
products (primarily skin care products) through retail stores which are
Company-owned or operated by franchisees in California, Texas,
Colorado, Arizona, Oklahoma and Nevada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES AND BASIS OF PRESENTATION
The Company's financial statements have been presented on the basis
that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business. The Company reported net losses of
$1,048,601 and $534,382, a working capital deficiency of $265,949 and
$279,361, and net cash used in operations of $366,975 and $337,199 in
fiscal 1999 and 1998, respectively.
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 obtaining additional
financing. There can be no assurances that the Company will be
successful in these efforts. Since September 30, 1999, the Company has
received an additional $66,500 in equity financing.
If management cannot achieve the 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 consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Sales by Company-owned retail stores are recorded when sold to a retail
customer. Sales to franchisees are recorded when products are shipped.
Provisions are made for estimated returns and allowances at the time of
sale.
At September 30, 1999, accounts receivable totaled $1,347. 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
and estimates that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of the revenues and
expenses during the reported period. Actual results could differ from
those estimates.
18
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments whereby the fair market value of
the financial instruments could be different than that recorded on a
historical basis. The Company's financial instruments consist of its
accounts receivable, accounts payable, notes payable and long-term
debt. Management believes the carrying amounts of the Company's
financial instruments generally approximate their fair values at
September 30, 1999; however, the fair values of the notes payable were
not readily determinable, as market comparables were not available for
such instruments.
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. Market is
determined by comparison with recent purchases or net realizable value.
Such net realizable value is based on forecasts for the sales of the
Company's products in ensuing years. Should demand for the Company's
products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially
less than the amount shown on the accompanying consolidated balance
sheet.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions
and major improvements are capitalized. Repairs and maintenance costs
are charged to operations as incurred. When property and equipment are
retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts, and gains or losses from
retirements and dispositions are credited or charged to income.
Depreciation and amortization are provided over the estimated useful
lives of the related assets, ranging from 3 to 5 years, using the
straight-line method. Leasehold improvements are amortized over the
lesser of the estimated useful life of the asset or the term of the
lease. Depreciation expense was $23,059 and $25,465 for the years ended
September 30 1999 and 1998, respectively.
Management of the Company assesses the recoverability of property and
equipment by determining whether the net carrying value of such assets
can be recovered over their remaining lives through projected
undiscounted cash flows. The amount of impairment, if any, is measured
based on fair value (projected discounted cash flows) and is charged to
operations in the period in which such impairment is determined by
management. Management has determined that there is no impairment of
property and equipment at September 30, 1999.
19
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
INTANGIBLE ASSETS
Intangible assets consist of covenants not to compete, customer lists
and goodwill arising from business combinations (see NOTE 3) 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 life 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. Amortization expense was $52,907 and
$42,086 for the years ended September 30, 1999 and 1998, respectively.
The Company assesses the recoverability of these intangible assets by
determining whether the net carrying value of such assets can be
recovered over their remaining lives through projected undiscounted
future cash flows. The amount of impairment, if any, is measured based
on fair value and charged to operations in the period in which the
impairment is determined by management. Management has determined that
there was no impairment of intangible assets as of September 30,1999.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs were
$70,483 and $81,048 in 1999 and 1998, respectively.
INCOME TAXES
The Company provides for income taxes under the liability method.
Accordingly, deferred tax assets and liabilities are computed for
differences between the financial statement carrying amounts and tax
bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts which are more
likely than not to be realized. The provision for taxes represents the
tax payable or refundable for the period plus or minus the change
during the period in deferred assets and liabilities.
PER SHARE AMOUNTS
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, EARNINGS PER SHARE ("EPS"). SFAS No. 128 requires dual
presentation of basic EPS and diluted EPS on the face of all income
statements. Basic EPS is computed as net income divided by the weighted
average of common shares for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issued through
stock options, warrants and other convertible securities. Both years
presented have been restated to adopt the provisions of SFAS No.128.
There was no effect on the per share amounts for either period as a
result of the adoption of SFAS No. 128. All potentially dilutive shares
have been excluded from dilutive EPS, as their effect would be
anti-dilutive for fiscal 1999 and 1998.
20
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
STOCK BASED COMPENSATION
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"ACCOUNTING FOR STOCK-BASED COMPENSATION," which defines a fair value
based method of accounting for stock-based compensation. However, SFAS
123 allows an entity to continue to measure compensation cost related
to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board Opinion
No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Entities
electing to remain with the accounting method of APB 25 must provide
pro forma disclosures of net income and earnings per share, as if the
fair value method of accounting defined in SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation to
employees under APB 25.
RECENT ACCOUNTING PRONOUNCEMENTS
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." Under
SFAS 130, the Company reports and displays all components of
comprehensive income in a full set of financial statements. SFAS No.
130 did not impact the Company's financial statements, as the Company
has no items of comprehensive income.
The FASB has issued Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." SFAS 131 changes how operating segments are reported in
annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports
issued to shareholders. SFAS 131 is effective for fiscal years
beginning after December 15, 19997, and need not be applied to interim
financial information in the initial year of its application. SFAS 131
was adopted during fiscal 1999 and did not have a material impact on
the Company, as the Company operates in one segment.
RECLASSIFICATIONS
Certain amounts in the 1999 financial statements have been reclassified
to conform to the 1998 presentation.
3. ACQUISITIONS, DISPOSITIONS AND OTHER
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"), whereby BFS was merged into BAC.
The merger was accounted for as a purchase. Goodwill arising from the
transaction amounted to $210,805 and is being amortized on a straight
line basis over 10 years. BAC has subsequently dissolved and all its
assets and liabilities were transferred to the Company.
21
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
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 (SEE NOTE 7), 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 monthly 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. 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 (SEE NOTE 5).
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 with the intention of being
relocated to a large regional mall. Its computer customer data base is
being serviced currently by other locations. The other store was closed
permanently. The net sales for the two closed locations were less than
$153,000 in 1997.
On December 5, 1997, the Company executed a settlement agreement with
the owners, one of whom 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 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. The Company
discounted the promissory note to $49,067 utilizing a 16% interest rate
and wrote off $1,611 of receivable related to the franchise location.
Consequently, the Company recorded $50,678 of goodwill, which is being
amortized on a straight line basis over 10 years.
On January 15, 1999, the Company acquired the assets of a 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 due from February 15, 1999 through
January 15, 2002.
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. (SEE NOTE 5)
The pro forma results of operations for 1999, assuming the acquired
franchise retail store had been acquired at the beginning of 1999, is
not presented here as the appropriate financial information is not
available.
22
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
SEPTEMBER 30, LIVES
1999 1998 (IN YEARS)
------------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements $ 95,226 $ 91,332 3
Equipment 111,762 112,998 3
Software 37,707 31,687 5
------------------------------------
244,695 236,017
Accumulated depreciation (196,937) (173,877)
------------------------------------
$ 47,758 $ 62,140
====================================
</TABLE>
5. INTANGIBLE ASSETS
Intangibles assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 1998
------------------------------------
<S> <C> <C>
Goodwill $ 372,387 $ 311,638
Customer lists 25,000 15,000
Covenant not-to-compete 30,000 20,000
Trademark 2,535 2,535
------------------------------------
429,922 349,173
Accumulated amortization (113,481) (60,575)
------------------------------------
$ 316,441 $ 288,598
------------------------------------
</TABLE>
23
<PAGE>
Biozhem Cosmeceuticals, Inc.
Note to Financial Statements
For the Years Ended September 30, 1999 and 1998
6. NOTES PAYABLE AND LINE OF CREDIT
Notes payable and line of credit consist of the following at September 30,
<TABLE>
<CAPTION>
1999 1998
----------------------------
<S> <C> <C>
Line of credit payable to Eldorado Bank, interest at prime plus 2 1/2%,
principal and interest due on September 1, 1998, secured by
substantially all assets of the Company and guaranteed by
the Company's president. $ - $ $50,651
Note payable to JCR (SEE NOTE 8), interest at 8%, principal and interest
payable monthly from February 15, 1997 through January 15, 1998,
collateralized by the Company's assets. The note was converted to
stock in 1999. - 27,985
Notes to various shareholders, interest at 10%, principal and interest are
due on demand. The notes were converted to stock in 1999. - 27,267
Note payable to OWN (SEE NOTE 12), interest at 10%, principal and interest
are due and payable within 12 months. 42,177 -
Note payable to JCR (SEE NOTE 8), interest at 10%, principal and interest
payments of $1,287 due from November 15, 1999 through September 15, 2000. 12,332 -
Other 4,846 12,166
----------------------------
$ 59,355 $118,069
============================
</TABLE>
On December 28, 1998, the Company converted the line of credit with Eldorado
Bank to a note payable, with an interest rate at prime plus 3%, which was repaid
in full prior to September 30, 1999.
24
<PAGE>
Biozhem Cosmeceuticals, Inc.,
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
7. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-----------------------------
<S> <C> <C>
Note payable to bank, interest at prime plus 3 1/2%, principal payments of
$833 plus interest are due through August 15, 2000 $ 9,167 $ 19,167
Note payable to seller of franchised retail stores (see NOTE 3), interest
at 8%, principal and interest payments of $1,538 payable monthly from
September 15, 1997 through July 15, 2000 21,961 31,482
Note payable to former franchisee for settlement agreement and mutual
release, imputed interest rate at 16%, monthly payments of $1,995 due
through June 1, 2000, net of unamortized debt discount of $3,460 and
$7,407, respectively 12,500 36,335
Subordinated note payable to JCR, interest at 8% collateralized by the
Company's assets and due on demand. The note was converted to stock
(SEE NOTE 8). - 53,786
Note payable to seller of a franchised retail store (SEE NOTE 3), interest
at 8%, principal and interest payments of $2,037 through
January 15, 2002 56,858 -
-----------------------------
100,486 140,770
Less current portion (69,675) (46,935)
-----------------------------
$ 30,811 $ 93,835
=============================
</TABLE>
Principal maturates are $69,675, $22,803 and $8,008 for the years ending
September 30, 2000, 2001 and 2002 respectively.
8. RELATED PARTY TRANSACTIONS
The Company subleases a portion of its corporate office space to JCR
Enterprises, Inc. ("JCR"), a company owned by an officer/director. The Company
received sublease income of $13,656 for the twelve months ended September 30,
1999 and 1998, respectively.
The Company had notes payable outstanding to JCR of $81,771 as of September 30,
1998. On July 15, 1999, notes payable to JCR totaling $112,824 were converted to
equity at the fair value of the stock with the issuance of 304,930 shares of the
Company's common stock.
25
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
As July 15, 1999, amounts owed to JCR in the form of accounts payable totaled
$27,332. On that date $15,000 was converted to equity by the issuance of 40,541
shares of the Company's common stock. The remaining $12,332 was converted to a
note payable to JCR, with interest at 10%, and principal and interest payments
of $1,287 due from November 15, 1999 through September 15, 2000.
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>
1999 1998
------------------------------------
<S> <C> <C>
Expected income tax benefit at 34% $ (357,000) $ (181,700)
Change in valuation allowance 357,000 181,700
------------------------------------
Income tax expense $ - $ -
====================================
Deferred tax assets consist of the following:
SEPTEMBER 30
1999 1998
------------------------------------
Net operating loss carryforwards $ 1,648,000 $ 1,406,000
Expenses recognized for granting warrants 115,000 -
Depreciation and amortization 4,000 4,000
Intangibles 15,000 15,000
Accruals 4,000 4,000
------------------------------------
1,786,000 1,429,000
Less valuation allowance (1,786,000) (1,429,000)
------------------------------------
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, 1999. Accordingly, a valuation allowance has
been provided for the full amount of the Company's deferred tax assets.
At September 30, 1999, the Company had a federal net operating loss carryforward
of approximately $4,900,000 and state net operating loss carry forward of
approximately $2,450,000. If not used to offset future income, these loss
carryforwards will expire between 2002 and 2014. 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 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.
26
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
10. STOCK HOLDERS' EQUITY
STOCK ISSUANCES
During 1998, the Company sold 366,667 shares of its common stock.
Proceeds to the Company were $105,000, net of offering costs of $0. In
addition, the Company committed 356,666 shares of common stock for
$121,950. In connection with the commitment of 70,000 of these shares,
warrants to acquire 35,000 shares of common stock at $1.00 per share
were issued. These warrants expire September 30, 2001 and have
piggyback registration rights. In connection with this offering, the
Company committed 52,319 shares of its previously unissued common stock
and paid $5,502 as offering costs.
On September 15, 1998 the Company committed a total of 16,668 shares of
common stock for consulting fees to an outside firm at a share price of
$0.50 for a total of $8,334. On September 30, 1998, the Company
committed a total of 554,761 shares of common stock as follows: 463,096
shares were committed to shareholders to convert $127,352 of debt to
equity and an additional cost of $34,885 as a result of the inducement
to convert, 91,665 shares of common stock were committed in lieu of
cash for directors' fees for a total of $45,833.
The Board of Directors proposed at its August 18, 1998 annual meeting
that Article Four of the Articles of Incorporation be amended to (i)
reclassify each share of issued and outstanding Common Stock of the
Company into one-fifth (1/5) of a share of Common Stock, (ii) increase
the number of authorized shares of Common Stock to 100,000,000, (iii)
authorize 10,000,000 shares of Preferred Stock, and (iv) authorize the
Board of Directors to establish series of Preferred Stock by fixing and
determining the designations, preferences, limitations and relative
rights, including voting rights, of the shares of any series so
established. The issue was passed by the shareholders. The Company has
adjusted all stock amounts to reflect the reverse stock split and has
not yet established any series of Preferred Stock.
During 1999, the Company sold 1,181,371 shares of its common stock.
Proceeds to the Company were $370,950, net of offering costs of
$77,550.
In the year ended 1999, the Company committed 14,911 shares of common
stock for $5,517 in debt cancellation and 103,135 shares of common
stock for $27,280 in consulting fees.
On February 15, 1999, the Company issued 35,000 shares as the $15,750
down payment for the purchase of the Kentucky franchise. On June 29,
1999, the Company issued 10,000 shares as a bonus to an employee at a
share price of $0.50. Concurrent with the OWN transaction, on July 15,
1999, the Company issued a total of 528,750 shares of common stock as
follows: 442,540 shares of common stock were issued to shareholders to
convert $163,183 of debt to equity; 86,210 shares of common stock were
issued in lieu of cash payments for consulting fees totaling $28,566;
32,095 shares of common stock were issued in lieu of cash payments for
unpaid directors' fees for a total of $11,875. During the year ended
September 30, 1999, the Company issued a total of 272,629 shares of
common stock in lieu of cash payments for financial public relations
for a total of $124,675. The shares were issued as follows: 66,667
shares of common stock were issued on November 16, 1998; 87,671 shares
of common stock were issued on January 14, 1999; 63,291 shares of
common stock were issued on February 19, 1999; 35,000 shares of common
stock were issued on March 19, 1999;and 20,000 shares of common stock
were issued on July 1, 1999.
27
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
1998 STOCK OPTION PLAN
The Company has adopted the 1998 Stock Option Plan of Biozhem
Cosmeceuticals, Inc. (the "1998 Plan"). The purpose of the Plan is to
provide officers and employees of the Company and its subsidiaries and
other eligible individuals an incentive through grant of options to
acquire stock in the Company and encourage them to remain in the
Company's service.
Under the Plan, the Committee may, at any time prior to July 6, 2008,
grant to eligible persons either incentive stock options or
non-qualified stock options for an aggregate of 1,000,000 shares of the
Company's Common Stock. Any unexercised or canceled stock options may
be re-optioned under the Plan. Although not eligible to receive grants
of incentive stock options, members of the Board of Directors of the
Company who are not full-time employees of the Company or one of its
subsidiaries are eligible to receive grants of non-qualified options.
Directors who are full-time employees of the Company or one of its
subsidiaries are eligible to receive grants of either incentive stock
options or non-qualified options. The Committee may issue the options
to different optionees subject to varying vesting requirements. The
exercise price of any options granted under the Plan 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 on
the date of the grant at which time the price must be at least 110% of
the fair market value. The Plan was approved by a vote of the
shareholders.
Activity in the 1998 Stock Option Plan for the years ended September
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Avg.
Shares Exercise Price
-------------- ------------------
<S> <C> <C>
Outstanding at September 30, 1997 and 1998 - -
Granted 522,000 $.46
Exercised -
Canceled (10,000) (.46)
Outstanding at September 30, 1999 512,000 $.46
============== ==================
Exercisable at September 30, 1999 142,000 $.46
============== ==================
</TABLE>
The options have a remaining contractual life of 4.0 years at September
30, 1999.
SFAS 123 PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS 123. The fair value for these options was estimated at the date of
grant using the Black Scholes option pricing model with the following
28
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
assumptions for the year ended September 30, 1999; risk free interest
rate of 6.25%; dividend yield of 0%; expected life of the option 5
years; and volatility factor of the expected market price of the
Company's common stock of 72%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period.
Adjustments are made for options forfeited prior to vesting. There was
no effect on compensation expense, net loss, and net loss per share
(basic and diluted) had compensation costs for the Company's stock
option plans been determined based on fair value of the date of grant
consistent with the provisions of SFAS 123.
WARRANTS
The fair value of each warrant granted during fiscal 1999 and 1998 to
consultants and other service providers is estimated using the
Black-Scholes option-pricing model on the date of grant using the
following assumptions; (i) no dividend yield, (ii) average volatility
of 72 percent, (iii) weighted-average risk-free interest rate of
approximately 6.25 percent, and (iv) expected life of 1 year. The total
expense recorded in fiscal 1999 and 1998 for the granting of these
warrants was $337,051 and $0, respectively.
The following represents a summary of the warrants outstanding for the
years ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------
Wtd. Avg. Wtd. Avg.
Shares Ex Price Shares Ex Price
---------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding,
beginning of year 52,000 $ .80 - $ -
Granted 1,947,697 .63 52,000 .80
---------------------------------------------------
Outstanding, end of year 1,999,697 $ .63 52,000 $ .80
====================================================
</TABLE>
The warrants outstanding at September 30, 1999 have exercise prices
between $.40 and $1.00. All of the warrants are exercisable and have a
weighted average remaining contractual life of 4.1 years.
The outstanding warrants at September 30, 1999 are held by consultants,
other service providers and shareholders.
29
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
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 1999 and 1998 was approximately $204,000 and
$197,000, respectively, and future commitments are approximately
$169,000, $117,000, $83,000, $50,000 and $24,000 in 2000, 2001, 2002,
2003 and 2004, respectively.
12. 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;
30
<PAGE>
Biozhem Cosmeceuticals, Inc.
Notes to Financial Statements
For the Years Ended September 30, 1999 and 1998
(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 NOTE 10).
As of September 30, 1999, upon closing of the transaction, OWN made
available to the Company a loan of 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.
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.
In fiscal 1999, the Company recognized $12,000 in expense under the
Agreement.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
31
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Director
Name Age Position Since
---- --- -------- -----
John C. Riemann 59 Chairman 1991
Warren L. Hernand 63 Director 1995
Stan R. Wylie 57 Director 1995
Paul A. Reyff Sr. 69 Director 1995
Alan Goldsberry 47 Director 1995
Marti Wolf 57 President
JOHN C. RIEMANN has been a director of Biozhem since June of 1991, and was
Executive Vice President of Biozhem from October 1991 to May 1994. In December
1995, he was elected Chairman, CEO and President of the Company. Concurrent with
the signing of the Management Agreement with OWN on July 14, 1999, Mr. Riemann
stepped down as president of the Company, but remains as CEO and Chairman. Mr.
Riemann is president of JCR Enterprises, Inc., 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. Concurrent with signing of the Management Agreement with
OWN on July 14, 1999, Mr. Hernand vacated his position on the Board of Directors
for the Company. He is currently president of IAMCO Financial Corporation, a
financial services company that he has owned since 1982.
STAN R. WYLIE has been a director of Biozhem 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 the Company from 1986 to
1991.
PAUL A. REYFF SR. has been a director of Biozhem since August 1996. Concurrent
with the signing of the Management Agreement with OWN on July 14, 1999, Mr.
Reyff vacated his seat on the Board of Directors of the Company. Mr. Reyff is a
retired Navy captain and was employed by the Office of the Secretary of Defense
as a Business and Industry Specialist until April 1998. He has been Chief
Executive Officer of New England Investment Company since 1979.
ALAN GOLDSBERRY has been a director of Biozhem 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.
MARTI WOLF was elected President of the Company on July 14, 1999. Ms. Wolf
brings extensive experience in marketing to her new role with Biozhem. Ms. Wolf
was president of MW Consulting Group, a marketing strategies and development
firm. She also served as senior vice president for Los Angeles-based Kent &
Spiegel Direct, a national marketing firm specializing in direct response
television.
32
<PAGE>
Board of Directors Meetings and Compensation
- --------------------------------------------
During the fiscal year ended September 30, 1999, the Board of Directors
held nine meetings. All Board members attended all meetings held,
either in person or by telephone.
The Company recorded directors fees of $2,375 for each director for
fiscal year ended September 30, 1999. In lieu of cash payments, each of
the directors agreed to an issuance of 6,419 shares of the Company's
stock valued at $.37 per share.
NOMINATING COMMITTEE - this committee recommends candidates for the Board of
Directors and was comprised of Mr. Riemann and Mr. Hernand. Concurrent with the
signing of the Management Agreement with OWN in July 1999, Mr. Hernand stepped
down for the Board. His replacement on the Nominating Committee has not been
appointed.
ACQUISITION COMMITTEE - this committee evaluates acquisition proposals and makes
recommendations to the Board of Directors. The Acquisition Committee was
comprised of Mr. Riemann, Mr. Hernand and Mr. Wylie. Concurrent with the signing
of the Management Agreement with OWN, Mr. Hernand stepped down from the Board.
His replacement on the Acquisition Committee has not yet been appointed.
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, 1999 to each of the most highly
compensated officers:
ALL OTHER
PRINCIPAL COMPEN-
NAME POSITION(S) YEAR SALARY BONUS SATION **
- ---- ----------- ---- ------ ----- ---------
John C. Riemann President/CEO 1999 $ 79,167 $ 0 $ 2,375
John C. Riemann President/CEO 1998 $100,000 $ 0 $ 5,500
** On September 30, 1999, 6,419 shares of the Company's common stock valued at
$.37 per share were issued in lieu of cash payment for director's fees. On
September 30, 1998, 18,333 shares of the Company's common stock valued at $.30
per share were issued in lieu of cash payment for director's fees.
COMPENSATION ARRANGEMENTS
Mr. Riemann's annual salary as Chairman, CEO and President of the
Company was $100,000. Concurrently with the signing of the Management
Agreement with OWN, Mr. Riemann stepped down as president in July 1999.
Mr. Riemann remained as CEO of the Company at a salary of $0 per year.
The Company had no employment agreement with Mr. Riemann.
Ms. Wolf's annual salary as President of the Company is $100,000 per
year. The Company has an employment contract with Ms. Wolf .
Biozhem 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
Biozhem 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, 1999, regarding beneficial ownership of the Common Stock by each person who
is known by Biozhem 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 826,732 0 826,732 10.4%
c/o Biozhem Cosmeceuticals Inc.
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Brian P. Burns 620,000 0 620,000 7.8%
100 Bush Street, Ste. 1250
San Francisco, CA 94104
Michael Sabo 395,107 0 395,107 4.9%
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, 1999, regarding beneficial ownership of equity securities of
Biozhem by each of the Directors and Executive Officers and by all of
the Directors and Executive Officers as a group:
NUMBER OF
SHARES APPROX.
NAME OF TITLE BENEFICIALLY PERCENT
BENEFICIAL OWNER OF CLASS OWNED (A) OF CLASS
- ---------------- -------- --------- --------
John C. Riemann, Director/CEO Common 826,732 10.4%
c/o Biozhem Cosmeceuticals Inc.
32240 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Stan R. Wylie, Director Common 152,738 1.9%
15306 Quiet Creek.
Houston, TX 77095
Alan Goldsberry, Director Common 58,625 .07%
3245 Able Court
Murrietta, GA 30062
Directors, and Common 1,038,095 13%
Executive Officers as a Group (3 persons)
(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 Biozhem's records.
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 Biozhem, including but not limited to, joint
ventures, loan or option arrangements, puts or calls, guarantees
against loss or guarantees of profit, division of losses or profits, or
the giving or withholding of proxies, other than described herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended September 30, 1998, there were no
transactions or series of transactions with Biozhem 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).
During the fiscal year ended September 30, 1999, the following were the
only transactions or series of transactions with Biozhem 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).
Mr. Riemann On July 14, 1999, JCR Enterprises, Inc., a company for
which Mr. Riemann is president, agreed to cancel $127,824 in debt owed
to it by the Company. In consideration, the Company issued 345,471
shares of the Company's common stock to JCR Enterprises, Inc. at a
share price of $.37.
35
<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 (1)
3.2 Bylaws of Entourage International, Inc. (1)
3.3 Articles of Incorporation and amendments thereto (1)
4.1 Specimen Common Stock Certificate of Entourage International,
Inc., (1)
10.1 Amended Qualified Incentive Stock Option Plan for Entourage
International, Inc. (1)
10.2 Amended Qualified Stock Option Plan for Entourage
International, Inc. (1)
10.3 Amended Non-qualified Stock Option Plan for Entourage
International, Inc., (1)
10.4 License Agreement between Entourage International, Inc. and
Biogime Franchise Services (USA), Inc. dated May 2, 1994. (1)
10.5 Biogime Products Supply and Distribution Agreement between
Entourage International, Inc. and Biogime Franchise Services
(USA), Inc. dated May 2, 1994. (1)
10.6 Assignment and Assumption Agreement between Entourage
International, Inc. and Biogime Franchise Services (USA), Inc.
dated May 2, 1994. (1)
10.7 Services Agreement between Entourage International, Inc. and
Gage Research & Development Institute, Inc. dated July 12,
1994. (1)
10.8 Settlement and Release Agreement between Entourage
International, Inc. and John Southwell dated November 1, 1994.
(1)
10.9 Asset Purchase Agreement between Entourage International, Inc.
and Diamond Falcon Corporation dated December 29, 1994. (1)
10.10 Master Transaction Agreement (1)
10.11 Agreement and plan of merger with shareholders of Biogime
Franchise Services USA, Inc. (1)
10.12 1998 Stock Option Plan for Biozhem Cosmeceuticals, Inc. (1)
Subsidiary of Registrant (1)
27 Financial Data Schedule
(1) Previously Filed.
Copies of this document are available at no cost from Biozhem
Cosmeceuticals, Inc., 32238 Paseo Adelanto, Suite A, San Juan
Capistrano, CA 92675.
36
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
BIOZHEM COSMECEUTICALS, INC.
By: /S/ John C. Riemann
---------------------
John C. Riemann, Chief Executive Officer
Date: January 13, 2000
----------------
By: /S/ John C. Riemann
-------------------------
John C. Riemann
Director
Date: January 13, 2000
By: /S/ Alan Goldsberry
-------------------------
Alan Goldsberry
Director
Date: January 13, 2000
By: /S/ Stan W. Wylie
-------------------------
Stan W. Wylie
Director
Date: January 13, 2000
37
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