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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, 2000
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
-----------------------------
(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 $726,736.
As of September 29, 2000, the aggregate market value of the issuer's
common stock, $.001 par value, held by nonaffiliates of the issuer, is
$5,604,689 computed based upon the market price at that date. A limited trading
market exists.
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TABLE OF CONTENTS
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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..............................6-7
Item 6 Management's Discussion and Analysis.................................................7-11
Item 7 Financial Statements................................................................12-30
Item 8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure...........................................30
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act.............................31-32
Item 10 Executive Compensation.................................................................32
Item 11 Security Ownership of Certain Beneficial Owners and Management......................33-35
Item 12 Certain Relationships and Related Transactions.........................................35
Item 13 Exhibits, Lists and Reports on Form 8-K.............................................36-37
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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. The Company also
enters into marketing and distribution agreements with manufacturers of
specific products or product lines and resells those products through
Company-owned retail stores.
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 ("OWN") and the Company. OWN
was 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. For its services, OWN was to receive a monthly management fee
of 40% of pre-tax net income, 1,000,000 Class A warrants and other
contingent warrants (which were never earned). In addition, OWN agreed
to loan the Company up to $50,000 to cover operational cash flow needs.
On May 1, 2000, the Company terminated its Agreement with OWN. See Item
6 for a more complete description of the Agreement.
On September 22, 2000, the Company entered into a management agreement
with Beauty Resource, Inc., a Nevada corporation ("BR"). BR is engaged
by the Company to provide and perform for the Company all management
services reasonably necessary for the proper and efficient operation of
the Company for a five-year period. BR personnel currently assigned to
manage the day-to-day activities of the Company include individuals
designated as the Company's CEO and COO. BR will be paid $15,000 per
month and commencing on April 1, 2001, the Company will pay BR on a
quarterly basis throughout the remainder of the agreement, a fee in the
amount of 0.5% of net sales of the preceding quarter. In addition, BR
is entitled to performance options and cash bonuses. See Item 6 for a
more complete description of the BR Agreement.
On September 22, 2000 Biozhem signed a License and Supply Agreement
with Advanced Tissue Sciences, Inc., a Delaware Corporation ("ATS"),
which gives Biozhem the exclusive right to market skin care products
containing ATS' Nutrient Solution in the Direct Response market for a
period of ten years providing that sales goals are reached. Biozhem
will also pay to ATS a royalty and periodic milestone payments that are
dependent on achieving certain annual and cumulative sales levels. See
Item 6 for a more complete description of this Agreement.
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Business of Issuer
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A. PRODUCTS
The Company markets Biozhem skin care products that 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.
B. DISTRIBUTION
(1) Company-owned Retail Stores
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During fiscal 2000, the Company operated seven Company-owned retail
stores under the name Biozhem Skin Care Center, two of which were
closed by September 30, 2000. In 2000 essentially all sales were made
through Company-owned retail stores and 98% of total sales were from
Company-owned stores in the fiscal year ended September 30, 1999. 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, 2000 were:
Dallas, Texas (March 1991)
Phoenix, Arizona (March 1992)
Denver, Colorado (March 1993)
Santa Ana, California (February 1997)
San Diego, California (February 1997) (closed November 1999)
Tulsa, Oklahoma (July 1997)
Oklahoma City, Oklahoma (July 1997) (closed March 2000)
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 (closed January 1999)
The San Jose, Santa Ana, San Diego, Tulsa, Oklahoma City and Louisville
stores were acquired from franchisees; the Company opened the other
stores.
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 San Jose store was closed at the end of its lease with the
intention of relocating to a large regional mall. The Louisville store
closed in fiscal 1999. The San Diego and Oklahoma City stores were
closed during fiscal 2000 due to reduced walk-in sales and
unprofitability.
(2) Franchised and Licensed Retail Stores
-------------------------------------
During fiscal 1999 Biozhem products were distributed through one
franchised and one licensed retail store under the Biozhem Skin Care
Center name. These retail stores were located in Kentucky and Nevada.
In January 1999, the Company purchased the Kentucky location, closed
the store and made telephone and mail sales to customers in the
database from the corporate headquarters. During the 2nd quarter of
fiscal 2000, the Nevada licensee ceased purchasing product from the
Company and the license was revoked.
Sales to franchised and licensed retail stores were less than 1% of
total sales in fiscal 2000 and only 2% in fiscal 1999.
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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.
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". 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
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
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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 7 full-time, 12 part-time and 3 contract personnel.
Three of these individuals are officers of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 1,850 square feet of office space within a business
park setting in San Juan Capistrano, California. The Company also
leases retail space for each Company-owned retail store that 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 $184,000, $120,000, $68,000, $22,000, and $2,000 in
fiscal years 2001, 2002, 2003, 2004 and 2005, respectively.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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. There is still a
limited market in the Company's common stock now under the symbol
"BZHM". The following table sets forth the high and low bid prices of
Biozhem common stock for the periods shown.
QUARTER ENDED BID PRICES
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LOW HIGH
December 31, 1998 $.31 $.69
March 31, 1999 $.37 $.78
June 30, 1999 $.34 $.72
September 30, 1999 $.19 $.56
December 31,1999 $.20 $.30
March31, 2000 $.15 $.25
June 30, 2000 $.15 $.35
September 30, 2000 $.25 $.60
The above quotations reflect inter-dealer prices, without retail
mark-up, markdowns or commission, and may not necessarily reflect
actual transactions.
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As of September 30, 2000, there were approximately 600 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.
On September 30, 2000 the Company committed 36,000 shares of common
stock for consulting fees and 45,000 shares of common stock for
directors' fees. These shares were valued at $0.25 per share for a
total of $20,250 based on an outstanding private placement offering at
$0.25. These shares were committed upon reliance on the exemption from
the registration requirements of the Securities Act of 1933, ("The
Act"), as amended and such securities laws pursuant to the Section 4(2)
of The Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Forward-looking statements in this report, including without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and adequacy of resources, are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements involve risks and uncertainties including
without limitation the following: (i) the Company's plans, strategies,
objectives, expectations and intentions are subject to change at any
time at the discretion of the Company; (ii) the Company's plans and
results of operations will be affected by the Company's ability to
manage its growth and inventory; (iii) the Company's business is highly
competitive and the entrance of new competitors into or the expansion
of the operations by existing competitors in the Company's markets and
other operations in the retail climate could adversely affect the
Company's plans and results of operations; and (iv) other risks and
uncertainties indicated from time to time in the Company's filings with
the Securities and Exchange Commission.
GENERAL
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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.
The Louisville store was closed in January 2000 and the customer
database was transferred to the other Company stores for sales.
On September 22,2000 Biozhem signed a License and Supply Agreement with
Advanced Tissue Sciences, Inc., a Delaware Corporation ("ATS"), which
gives Biozhem the exclusive right to market skin care products
containing ATS' Nutrient Solution in the Direct Response market for a
period of ten years providing that certain sales goals are reached.
Biozhem will also pay to ATS a royalty and periodic milestone payments
that are dependent on achieving certain annual and cumulative sales
levels. The solution has been tested for safety and preliminary tests
have been conducted for efficacy. The Company has contracted with
DermTech International, a San Diego based independent lab, to conduct
detailed human efficacy and results testing. Initial product sales are
projected for late in March 2001. The Company plans to sell the product
through a number of Direct Response channels including infomercials,
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cable shopping networks, Biozhem branded or co-branded web sites, direct
mail and telemarketing as well as through Biozhem branded stores and
kiosks.
MANAGEMENT AGREEMENTS
---------------------
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 was 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 was in charge of marketing and
distribution activities on behalf of the Company. OWN was responsible
for all sales activities including determining which products to market,
selling prices, target customers, selecting distribution methods and
procedures and advertising activities. OWN was entitled to a
reimbursement of expenses for its services and a management 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 issued to OWN
warrants which contained cashless exercise provisions and protection
against stock split/reverses and had a term of five years from their
respective dates of issuance. The Warrants were to 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
the agreement;
(ii) For each $400,000 in cumulative Pre-Tax Net Income
that was generated by the Company during the term,
OWN was to 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 issued 1,000,000 Class A Warrants
to purchase shares of the Company's common stock at $0.56 per share. No
additional warrants were earned by the OWN under the Agreement.
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
had an interest rate of 10% for a one-year period. If the note was not
repaid at maturity it could be repaid with common stock of the Company
valued at $.37 per share, with piggyback registration rights. In
addition, OWN agreed to assist the Company and its advisors, and on a
best efforts basis and on terms mutually agreed upon, in arranging for
$200,000 in new equity. The balance on the note was $42,177 at September
30, 1999.
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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 were to be filled, as soon as
practicable, by two new outside directors acceptable to OWN and the
remaining directors. At any subsequent time, OWN would have had the
right to designate two (2) additional nominees, and the Company would be
obligated to cause the directors to increase the size of the Board to
seven members and appoint the two persons designated by OWN to fill the
vacancies so created, and such directors would 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, would resign effective immediately.
In October 1999, the Company amended the Agreement. As part of the
amendment, OWN agreed to increase its loan available to the Company to
$100,000 and to purchase 127,844 shares common stock for $66,500. The
Company opted thereafter to cancel its debt to OWN rather than collect
the $66,500 from OWN. In consideration for these transactions, the
Company agreed to lower the exercise price of 888,666 of the Class A
Warrants from $0.56 to $0.15 per share.
On May 1, 2000, the Company terminated its Agreement with OWN. In
connection with the termination, OWN agreed to exercise 958,521 shares
of Class A Warrants for $175,000 in cash and $51,569 in expense
reimbursements and cancel the remaining 41,479 warrants. OWN also agreed
to acquire co-ownership of the Company's pre-termination customer list
for a guaranteed royalty of $40,000.
On September 22, 2000, the Company entered into a management
agreement with Beauty Resource, Inc., a Nevada corporation ("BR"). BR is
engaged by the Company to provide and perform for the Company all
management services reasonably necessary for the proper and efficient
operation of the Company for a five-year period. BR personnel currently
assigned to manage the day-to-day activities of the Company include
individuals designated as the Company's CEO and COO.
BR will supervise the bookkeeping and accounting services for and on
behalf of the Company. BR will be responsible for all marketing,
distribution activities on behalf of the Company including, but not
limited to, determining which products to market, sales prices, target
markets and customers, selecting distribution methods and procedures and
advertising activities. Additionally, BR will be responsible for all
other administrative functions of the Company including, without
limitation, hiring and personnel matters, compensation arrangements with
employees of the Company, selecting outside advisors and consultants to
the Company, choosing vendors and suppliers, selecting and negotiating
banking relationships and all other normal and customary activities
associated with operating a business.
BR is entitled to a reimbursement, which shall be a payment of $15,000
per month. In addition, commencing April 1, 2001 and continuing on the
first day of each quarter thereafter during the remaining term of the
agreement, the Company shall pay BR a fee in the amount of 0.5% of the
sales (net of returns and allowances) of the Company for the preceding
quarter.
Upon signing of the agreement, the Company awarded the new CEO options
to purchase 100,000 shares of the Company common stock at an exercise
price of $0.25 per share, to be exercised on or before September 30,
2003.
In addition, as defined in the agreement, BR is entitled to performance
options of up to 2,000,000 shares through March 31, 2006 at $0.25 per
share based on achieving certain sales targets and 3,000,000 shares
through March 31, 2006 at $0.25 per share based on achieving certain
pre-tax net income levels. BR may earn cash bonuses of up to 5% of
pre-tax net income based on achieving certain ratios of pre-tax net
income to sales. To date, BR has earned no such options or cash awards.
LIQUIDITY
---------
The Company has recently experienced severe liquidity shortages.
Principal contributing factors to the deterioration of the Company's
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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. The cash
balance at September 30, 2000 was $61.215. However, net cash used in
operations totaled $418,613 in fiscal 2000 and $366,975 in fiscal 1999.
Current liabilities exceeded current assets by $491,763 at September 30,
2000. As a result, the Company's independent certified public
accountants have stated in their report included in this Form 10-KSB,
that these conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In October 1999, the Company amended its contract with OWN and issued
127,844 shares of stock for the conversion of $66,500 in debt. OWN
agreed to increase its loan available to the Company to $100,000. In
consideration for these transactions, the Company agreed to lower the
exercise price of 888,666 of the Class A Warrants from $.56 to $.15. On
May 1, 2000, the Company terminated its contract with OWN. In connection
with the cancellation, OWN agreed to exercise 958,521 Class A Warrants
for $175,000 and $51,569 in expense reimbursement and cancel the
remaining 41,479 warrants. OWN also agreed to acquire co-ownership of
the Company's pre-termination customer list for $40,000.
On May 4, 2000, the Company sold 400,000 shares of common stock to a
third party for cash. In conjunction with this sale, warrants to
purchase 400,000 shares of the Company's common stock were granted to
this third party as an incentive to purchase the stock. Therefore, the
granting of the warrants had no net impact on operations or equity.
In September 2000, the Company committed 36,000 shares in payment of
consulting fees of $9,000 and 45,000 shares for payment of directors'
fees of $11,250.
In fiscal 2000, the Company granted 1,608,000 options to consultants,
valued at $368,000. The fair value of each non-Plan option granted was
estimated using the Black-Scholes option-pricing model.
The Company must still rely primarily on operating cash flow and cash
management to sustain its operations. The Company's 2001 operating plan
contemplates improved operating results and cash flow. Subsequent to
year-end, the Company has completed an additional equity financing of
$762,500 through a private placement and additional borrowings of
$300,000 and is continuing to actively pursue additional financing
sources. If management cannot achieve its 2001 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 2001 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."
OPERATIONS - 2000 COMPARED TO 1999
----------------------------------
Biozhem incurred a net loss of $1,010,356 in 2000 compared to a net
loss of $1,048,601 in 1999.
Net sales in 2000 decreased $347,227 or 32% compared to sales in 1999.
One Company-owned store was closed in November 1999, and another in
March 2000. Average monthly sales per Company-owned store in operation
during the entire fiscal year dropped to $11,236 in 2000 compared to
$12,525 in 1999. Company-owned stores accounted for 100% and 98% of
total net sales in 2000 and 1999, respectively. Franchised and licensed
stores accounted for 2% of total net sales in 1999.
Gross profit in 2000 decreased by $322,583 or 38% as compared to the
corresponding amount for 1999. Gross profit as a percentage of net
sales declined to 73% in 2000 from 81% in 1999 due to increased sales
incentives, additional shipping costs caused by low inventory levels
during the OWN management agreement and a small increase in product
costs.
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Selling, general and administrative expenses decreased by $331,962, or
18%, in 2000 as compared to 1999 due to a reduction of advertising cost
by $42,986, reduced payroll and payroll related costs of $179,581 and a
reduction in corporate overhead costs. These reduced costs were
primarily associated with the reduction in the number of Company-owned
stores.
Depreciation decreased in 2000 by $4,134 as compared to 1999 primarily
to the reduction in the number of stores. Amortization was
approximately the same in 2000 and 1999.
Interest expense increased by $11,034 in 2000 as compared to 1999 due
primarily to the increase in debt in 2000.
At September 30, 2000, the Company had federal and state net operating
loss carryforwards of approximately $5,510,000 and $2,790,000,
respectively. If not used to offset future taxable income, these loss
carryforwards will expire between 2002 and 2015. 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, 2000. Accordingly, a
valuation allowance has been provided for the full amount of the
Company's deferred tax assets.
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.
YEAR 2000 ISSUE
---------------
The Company has experienced no problems in connection with the
so-called "Year 2000" issue.
11
<PAGE>
Item 7: Financial Statements
Reports of Independent Auditors..............................................13
Financial Statements
--------------------
Balance Sheets as of September 30, 2000 and 1999.............................14
Statements of Operations - Years ended September 30, 2000 and 1999...........15
Statements of Stockholders' Equity - Years ended
September 30, 2000 and 1999...........................................16-17
Statements of Cash Flows - Years ended September 30, 2000 and 1999...........18
Notes to Financial Statements.............................................18-30
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 2000 and 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the management of
the Company. Our responsibility is to express an opinion on the 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. as
of September 30, 2000 and 1999, 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 2 to
the financial statements, the Company has recurring losses, a working capital
deficit and is in default of certain notes payable. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty (including any impairment losses on intangible
assets).
CORBIN & WERTZ
Irvine, California
December 20, 2000
13
<PAGE>
Biozhem Cosmeceuticals, Inc.
Balance Sheet
<TABLE>
<CAPTION>
As of September 30,
------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 61,215 $ -
Accounts receivable - 1,347
Inventory 25,641 59,862
Prepaid expenses and other current assets 461 3,268
-------------- --------------
Total current assets 87,317 64,477
Property and equipment, net 28,833 47,758
Intangible assets, net 263,266 316,441
Other assets 12,256 23,350
-------------- --------------
$ 391,672 $ 452,046
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 230,911 $ 201,396
Notes payable 269,512 59,355
Current portion of long-term debt 78,657 69,675
-------------- --------------
Total current liabilities 579,080 330,426
Long-term debt, less current portion - 30,811
-------------- --------------
Total liabilities 579,080 361,237
-------------- --------------
Commitments and contingencies
Stockholders' equity (deficit):
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; 9,575,048 and 7,985,548 shares
issued and outstanding at September 30, 2000 and
1999, respectively 9,575 7,985
Common stock subscribed, $.001 par value; 95,911
and 118,046 shares committed as of September 30,
2000 and 1999, respectively 96 118
Additional paid-in capital 6,070,672 5,340,081
Accumulated deficit (6,267,751) (5,257,395)
-------------- --------------
Total stockholders' equity (deficit) (187,408) 90,789
-------------- --------------
$ 391,672 $ 452,026
============== ==============
</TABLE>
SEE INDEPENDENT AUDITORS' REPORT AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
Biozhem Cosmeceuticals, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999
<S> <C> <C>
Net sales
$ 726,736 $ 1,073,933
Cost of sales 195,111 219,755
-------------- --------------
Gross profit 531,625 854,208
-------------- --------------
Expenses:
Selling, general and administrative 1,480,088 1,812,050
Depreciation 18,925 23,059
Amortization 53,175 52,907
-------------- --------------
Total expenses 1,552,188 1,888,016
-------------- --------------
Loss from operations (1,020,563) (1,033,808)
Interest expense (34,014) (22,980)
Other income 44,221 8,187
-------------- --------------
Net loss $ (1,010,356) $ (1,048,601)
============== ==============
Net loss per common and equivalent share -
basic and diluted $ (0.12) $ (0.17)
============== ==============
Weighted average number of common
shares outstanding 8,711,648 6,307,321
============== ==============
</TABLE>
SEE INDEPENDENT AUDITORS' REPORT AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
<TABLE>
BIOZHEM COSMECEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
----------------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCK COMMITTED COMMON STOCK
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances at October 1, 1998 4,945,282 $ 4,945 980,414 $ 980
Shares committed upon
conversion of debt - - 14,911 15
Shares committed for services - - 103,135 103
Shares sold, net of offering costs
of $77,550 1,181,378 1,181 - -
Shares issued for purchase of
assets 35,000 35 - -
Shares issued for services 400,934 401 - -
Conversion of debt to common
stock 442,540 443 - -
Subscribed shares issued 980,414 980 (980,414) (980)
Warrants issued for services - - - -
Net loss - - - -
-------------- -------------- -------------- --------------
Balances at September 30, 1999 7,985,548 7,985 118,046 118
(CONTINUED)
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
-------------- -------------- --------------
Balances at October 1, 1998 $ 4,252,412 $ (4,208,794) $ 49,543
Shares committed upon
conversion of debt 5,502 - 5,517
Shares committed for services 27,177 - 27,280
Shares sold, net of offering costs
of $77,550 369,769 - 370,950
Shares issued for purchase of
assets 15,715 - 15,750
Shares issued for services 169,715 - 170,116
Conversion of debt to common
stock 162,740 - 163,183
Subscribed shares issued - - -
Warrants issued for services 337,051 - 337,051
Net loss - (1,048,601) (1,048,601)
-------------- -------------- --------------
Balances at September 30, 1999 5,340,081 (5,257,395) 90,789
----------------------------------------------------------------------------------------------------------------
Continued
</TABLE>
16
<PAGE>
<TABLE>
BIOZHEM COSMECEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
----------------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCK COMMITTED COMMON STOCK
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shares committed for services - - 81,000 81
Shares sold for cash 400,000 400 - -
Issuance of shares upon
conversion of debt 127,844 128 - -
Exercise of warrants for cash and
reimbursement of expenses 958,521 959 - -
Subscribed shares issued 103,135 103 (103,135) (103)
Options issued for services - - - -
Net loss - - - -
-------------- -------------- -------------- --------------
Balances at September 30, 2000 9,575,048 $ 9,575 95,911 $ 96
============== ============== ============== ==============
(CONTINUED)
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
-------------- -------------- --------------
Shares committed for services 20,169 - 20,250
Shares sold for cash 49,600 - 50,000
Issuance of shares upon
conversion of debt 66,372 - 66,500
Exercise of warrants for cash and
reimbursement of expenses 225,610 - 226,569
Subscribed shares issued - - -
Options issued for services 368,840 - 368,840
Net loss - (1,010,356) (1,010,356)
-------------- -------------- --------------
Balances at September 30, 2000 $ 6,070,672 $ (6,267,751) $ (187,408)
============== ============== ==============
----------------------------------------------------------------------------------------------------------------
SEE INDEPENDENT AUDITORS' REPORT AND
ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
17
<PAGE>
Biozhem Cosmeceuticals, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,010,356) $ (1,048,601)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 72,100 75,966
Common stock committed for services 20,250 27,280
Common stock issued for services - 170,116
Exercise of warrants for reimbursement of expenses 51,569 -
Options issued for services 368,840 337,051
Changes in operating assets and liabilities:
Accounts receivable 1,347 1,655
Inventory 34,221 30,460
Prepaid expenses and other current assets 2,807 1,970
Other assets 11,094 48,651
Accounts payable and accrued liabilities 29,515 (11,523)
-------------- --------------
Net cash used in operating activities (418,613) (366,975)
-------------- --------------
Cash flows used in investing activities:
Purchases of property and equipment - (8,677)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common shares
and exercise of warrants 225,000 370,950
Proceeds from borrowings 338,506 160,379
Repayment of debt (83,678) (155,677)
-------------- --------------
Net cash provided by financing activities 479,828 375,652
-------------- --------------
Net increase in cash 61,215 -
Cash at beginning of year - -
-------------- --------------
Cash at end of year $ 61,215 $ -
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 17,125 $ 22,980
============== ==============
Supplemental disclosure of non-cash investing and
financing activities:
Conversion of debt into common stock $ 66,500 $ 163,183
============== ==============
Stocks committed for conversion of debt $ - $ 5,517
============== ==============
Issuance of debt for the acquisition of assets $ - $ 65,000
============== ==============
Common stock issued for acquisition of assets $ - $ 15,750
============== ==============
</TABLE>
18
<PAGE>
NOTE 1 - ORGANIZATION
---------------------
Description of the Company
--------------------------
Biozhem Cosmeceuticals, Inc. (the "Company"), formerly known as Entourage
International, Inc., markets and distributes consumer products (primarily skin
care products) through a network of Company-owned retail stores located in
California, Texas, Colorado, Arizona and Oklahoma.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Principles of Basis of Presentation
-----------------------------------
The Company's financial statements for the years ended September 30, 2000 and
1999 have been presented on the basis that it 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 $1,010,356
and $1,048,601 and net cash used in operating activities of $418,613 and
$366,975 in fiscal 2000 and 1999, respectively. In addition, the Company had a
working capital deficit of $491,763 and was in default of certain notes payable
(see Note 7) at September 30, 2000.
The Company's continued existence is dependent upon its ability to achieve its
2001 operating plan, which contemplates significantly improved operating results
and cash flows and obtaining additional financing. There can be no assurances
that the Company will be successful in these efforts. Since September 30, 2000,
the Company has received an additional $687,500 in equity financing and $300,000
in borrowings (see Note 13).
If management cannot achieve the 2001 operating plan because of sales
shortfalls, reduced profit margins or other unfavorable events, the Company may
find it necessary to further reduce expenses or undertake other actions as may
be appropriate. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty (including any impairment
losses on intangible assets).
Revenue Recognition
-------------------
Sales by company-owned retail stores are recorded when sold to a retail
customer. Provisions are made for estimated returns and allowances at the time
of sale.
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.
Fair Value of Financial Instruments
-----------------------------------
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard No. 107 ("SFAS 107") "DISCLOSURES ABOUT 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 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, 2000; 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
19
<PAGE>
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 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 totaled $18,925
and $23,059 for the years ended September 30, 2000 and 1999, 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, 2000.
Intangible Assets
-----------------
Intangible assets consist of covenants not to compete, customer lists and
goodwill arising from business combinations 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 totaled $53,175 and
$52,906 for the years ended September 30, 2000 and 1999, 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, 2000.
Advertising
-----------
Advertising costs are expensed as incurred. Advertising costs totaled $27,857
and $70,843 in fiscal 2000 and 1999, 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.
20
<PAGE>
Earnings Per Share
------------------
The Company records earnings per share in accordance with Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "EARNINGS PER SHARE" ("EPS"). SFAS
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 the common shares issued through stock options,
warrants and other convertible securities. All potentially dilutive shares have
been excluded from dilutive EPS, as their effect would be anti-dilutive for
fiscal 2000 and 1999.
Stock-Based Compensation
------------------------
The FASB has 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.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44") "ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB
OPINION 25." FIN 44 clarifies the application of APB 25 for (a) the definition
of employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequences for various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective on July 1, 2000, but
certain provisions cover specific events that occur after either December 15,
1998, or January 12, 2000. The adoption of FIN 44 prior to June 30, 2000 did not
have a material effect on the financial statements.
Comprehensive Income
--------------------
The Company has 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. For fiscal 2000 and 1999, the Company had no items of
comprehensive income.
Segments
--------
The FASB has issued Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." As
the Company operates in one segment, the Company has not provided any additional
segment disclosures as required under SFAS 131.
Recent Accounting Pronouncements
--------------------------------
The FASB has issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "ACCOUNTING FOR DERIVATIVE AND HEDGING ACTIVITIES." SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet at their fair value. This statement, as amended
by SFAS 137, is effective for financial statements for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of this standard to have a material impact on its results of
operations, financial position or cash flows as it currently does not engage in
any derivative or hedging activities.
21
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "REVENUE RECOGNITION," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosures related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the first quarter of the
fiscal year beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on its financial position and
results of operations.
NOTE 3 - ACQUISITIONS
---------------------
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.
The pro forma results of operations for fiscal 1999, assuming the acquired
franchise retail store had been acquired at the beginning of fiscal 1999 is not
presented here as the appropriate financial information is not available.
There were no acquisitions during fiscal 2000.
NOTE 4 - PROPERTY AND EQUIPMENT
-------------------------------
Property and equipment consist of the following at September 30:
Estimated Useful
Lives (in years) 2000 1999
----------------- -------------- --------------
Leasehold improvements 3 $ 95,226 $ 95,226
Equipment 3 111,762 111,762
Software 5 37,707 37,707
-------------- --------------
244,695 244,695
Less accumulated depreciation (215,862) (196,937)
-------------- --------------
$ 28,833 $ 47,758
============== ==============
22
<PAGE>
NOTE 5 - INTANGIBLE ASSETS
--------------------------
Intangible assets consist of the following at September 30:
2000 1999
-------------- --------------
Goodwill $ 372,387 $ 372,387
Customer lists 25,000 25,000
Covenant not-to-compete 30,000 30,000
Trademark 2,535 2,535
-------------- --------------
429,922 429,922
Less accumulated amortization (166,656) (113,481)
-------------- --------------
$ 263,266 $ 316,441
============== ==============
NOTE 6 - NOTES PAYABLE
----------------------
Notes payable consist of the following at September 30:
2000 1999
-------------- --------------
Notes payable to a shareholder, interest at 12%,
principal and accrued interest are payable on
demand. One note totaling $100,000 was paid in
full subsequent to September 30, 2000. $ 251,529 $ -
Note payable to One World Networks Integrated
Technologies, Inc. ("OWN"), interest rate at 10%
per annum, maturing on August 1, 2000. - 42,177
Note payable to JCR Advertising (Note 8),
interest at 10%, principal and interest payable
monthly from February 15, 1997 through January
15, 1998, collateralized by the Company's assets.
Note was paid in full subsequent to September
30, 2000. 13,137 12,332
Other 4,846 4,846
-------------- --------------
$ 269,512 $ 59,355
============== ==============
23
<PAGE>
NOTE 7 - LONG-TERM DEBT
-----------------------
Long-term debt consisted of the following at September 30:
2000 1999
-------------- --------------
Note payable to former franchisee, interest at
8%, principal and interest payments of $2,037
payable monthly through January 2002. This note
was paid in full subsequent to September
30, 2000. $ 55,358 $ 56,858
Note payable to former franchisee, interest at
8%, principal and interest of $1,538 payable
monthly from September 15, 1997 through July 15,
2000. This note is currently in default. 16,561 21,961
Note payable to former franchisee, imputed
interest at 16%, payments of $1,995 due through
June 1, 2000. This note was paid in full
subsequent to September 30, 2000. 5,900 12,500
Note payable to bank, interest at prime plus
3 1/2% (totaling 12.75%), principal payments of
$833 plus interest due through August 15, 2000.
This note was paid in full subsequent to
September 30, 2000. 838 9,167
-------------- --------------
78,657 100,486
Less current portion (78,657) (69,675)
-------------- --------------
$ - $ 30,811
============== ==============
Principal maturities are $78,657 for the year ending September 30, 2001.
24
<PAGE>
NOTE 8 - RELATED PARTY TRANSACTIONS
-----------------------------------
The Company had notes payable outstanding with JCR Advertising as of September
30, 2000 and 1999 of $13,137 and $12,332, respectively. Interest expense on
these notes was approximately $1,600 and $3,000 for fiscal 2000 and 1999. On
July 15, 1999, notes totaling $112,824 were converted to equity with the
issuance of 304,930 shares of the Company's common stock.
During fiscal 2000, the Company borrowed funds from a shareholder. At September
30, 2000, the amount due the shareholder totaled $251,529 (see Note 6). Interest
expense recorded on these notes for the year ended September 30, 2000 was
approximately $18,600.
NOTE 9 - INCOME TAXES
---------------------
The following is a reconciliation of federal income taxes computed at the
statutory rate of 34% to income tax expense as reported for the years ended
September 30:
2000 1999
-------------- --------------
Expected income tax benefit at 34% $ (344,000) $ (357,000)
Change in valuation allowance 344,000 357,000
-------------- --------------
Income tax expense $ - $ -
============== ==============
Deferred tax assets consist of the following as of September 30:
2000 1999
-------------- --------------
Net operating loss carryforwards $ 1,872,000 1,648,000
Expenses recognized for granting warrants 240,000 115,000
Other 18,000 23,000
-------------- --------------
2,130,000 1,786,000
Less valuation allowance (2,130,000) (1,786,000)
-------------- --------------
Net deferred tax assets $ - $ -
============== ==============
During fiscal 2000 and 1999, the valuation allowance increased by $344,000 and
$357,000, respectively.
25
<PAGE>
NOTE 9 - INCOME TAXES, CONTINUED
--------------------------------
At September 30, 2000, the Company had a federal and state net operating loss
carryforward of approximately $5,510,000 and $2,790,000, respectively. If not
used to offset future income, these loss carryforwards will expire between 2002
and 2015. 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.
Based on numerous factors, including but not limited to the Company's historical
losses and the uncertainty regarding net operating loss carryforward limitation,
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, 2000. Accordingly, a valuation allowance has been
provided for the full amount of the Company's deferred tax assets.
NOTE 10 - STOCKHOLDERS' EQUITY
------------------------------
Stock Issuances
---------------
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 addition, the
Company committed to issue 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 (see Note 3). On June 29,
1999, the Company issued 10,000 shares as a bonus to an employee at a share
price of $0.50. 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;
32,056 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 were issued on November 16, 1998; 87,671
shares were issued on January 14, 1999; 63,291 shares were issued on February
19, 1999; 35,000 shares were issued on March 19, 1999; and 20,000 shares were
issued on July 1, 1999.
On September 30, 2000, the Company committed 36,000 shares of common stock for
consulting fees and 45,000 shares of common stock for directors' fees. These
shares were valued at $0.25 per share for a total of $20,250 based on an
outstanding private placement offering at $0.25 (see Note 13).
On December 14, 1999, OWN received 127,844 shares of common stock in exchange
for $66,500 of indebtedness due from the Company (see Note 12).
On May 4, 2000, the Company sold 400,000 shares of common stock to a third party
for cash. In conjunction with this sale, warrants to purchase 400,000 shares of
the Company's common stock at $0.125 per share were granted to this third party
as an incentive to purchase the stock. Therefore, the granting of the warrants
had no net impact on operations or equity.
On May 1, 2000, OWN exercised warrants to acquire 958,521 shares of common stock
for $175,000 in cash and $51,569 in expense reimbursements (see Note 12).
On July 14, 2000, the Company issued 103,135 shares of stock to third parties
for transactions that were recorded in the Company's September 30, 1999
financial statements. The value of such shares was previously recorded as shares
subscribed; therefore, the issuance had no net impact on operations or equity.
26
<PAGE>
Stock Options
-------------
The Company has adopted the 1998 Stock Option Plan of Biozhem Cosmeceuticals,
Inc. (the "Plan"). The purpose of the Plan is to provide officers and employees
of the Company 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 are eligible to receive grants of non-qualified options. Directors who
are full-time employees of the Company 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. In fiscal 1999, 522,000 options were
granted under the Plan. No options were granted under the Plan in fiscal 2000.
In fiscal 2000, the Company granted 1,608,000 options to consultants, valued
under SFAS 123 at $368,000. The fair value of each non-Plan option granted was
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 108% (iii) weighted average risk-free interest rate of 6.0%, and (iv)
expected life of 3 to 3.5 years.
FAS 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 assumptions for fiscal 2000 and 1999:
risk free interest rate of 6.0% and 6.25%; dividend yield of 0%; expected life
of the option ranging from 3 to 5 years; and volatility factor of the expected
market price of the Company's common stock of 108% and 72%, respectively.
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 for both fiscal 2000 and
1999.
27
<PAGE>
Warrants
--------
During fiscal 1999, 1,947,697 Class A Warrants were issued to consultants and
other service providers. Of the warrants issued, 1,000,000 Class A Warrants were
issued to OWN upon execution of a management agreement with OWN (see Note 12).
The fair value of each warrant granted during fiscal 1999 was 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% (iii)
weighted average risk-free interest rate of 6.25%, and (iv) expected life of 1
year. The total expense recorded in fiscal 1999 for the granting of warrants was
$337,051.
In October 1999, the Company amended its agreement with OWN (See Note 12). As
part of that amendment, the Company agreed to lower the exercise price of
888,666 of the 1,000,000 Class A Warrants from $0.56 to $0.15 per share. The
repricing of these warrants resulted in variable award accounting under FASB
Interpretation No. 44. Because of the decline in the Company's stock price since
the date of the original warrant grant, no additional expense was required for
the year ended September 30, 2000 under variable award accounting. 958,521 of
these warrants were exercised on May 1, 2000 and the remaining 41,479 of the
Class A Warrants were cancelled as part of the Company's termination of its
management agreement with OWN (see Note 12).
On May 4, 2000, 400,000 warrants at an exercise price of $.125 per share were
issued to a third party in connection with the purchase of stock. The issuance
of these warrants had no impact on operations or equity.
The outstanding warrants at September 30, 2000 are held by consultants, other
service providers and shareholders.
The following is a summary of stock option and warrant activity during fiscal
2000 and 1999:
Weighted
Shares Average Price
-------------- --------------
Outstanding at September 30, 1998 52,000 $ 0.80
Granted 2,469,697 0.59
Exercised - -
Cancelled (10,000) (0.46)
-------------- --------------
Outstanding at September 30, 1999 2,511,697 0.59
Granted 2,008,000 0.23
Exercised (958,521) (0.24)
Cancelled (61,479) (0.50)
-------------- --------------
Outstanding at September 30, 2000 3,499,697 $ .39
============== ==============
Exercisable at September 30, 2000 3,355,697 $ .38
============== ==============
28
<PAGE>
The following table summarizes information about stock options and warrants
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------------- ----------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Price Total Life Exercise Price Total Exercise Price
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.49 2,517,000 3.1 years $ 0.27 2,373,000 $ 0.26
$0.50 - $1.00 982,697 1.4 years 0.69 982,697 0.69
---------------- ---------------- ---------------- ----------------
3,499,697 $ 0.39 3,355,697 $ 0.38
================ ================ ================ ================
</TABLE>
NOTE 11 -COMMITMENTS
--------------------
Leases
------
The Company leases its facilities and equipment under non-cancelable operating
leases expiring in October 2004. Rent expense in fiscal 2000 and 1999 was
approximately $212,000 and $204,000, respectively, and future commitments are
approximately $184,000, $120,000, $68,000, $22,000, and $2,000 in fiscal 2001,
2002, 2003, 2004 and 2005, respectively.
Marketing Agreement
-------------------
On September 22, 2000, Biozhem signed a License and Supply Agreement with
Advanced Tissue Sciences, Inc., a Delaware Corporation ("ATS"), which gives
Biozhem the exclusive right to market skin care products containing ATS'
Nutrient Solutions in the Direct Response market for a period of ten years
providing that sales goals are reached. Biozhem will also pay to ATS a royalty
and periodic milestone payments that are dependent on achieving certain annual
and cumulative sales levels.
NOTE 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 OWN and the Company. OWN was 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. For its services, OWN was to receive a monthly management fee of 40% of
pre-tax net income, 1,000,000 Class A warrants and other contingent warrants
(which were never earned). In addition, OWN agreed to loan the Company up to
$50,000 to cover operational cash flow needs.
In October 1999, the Company amended the Agreement. As part of the amendment,
OWN agreed to increase its loan available to the Company to $100,000 and to
purchase 127,844 shares common stock for $66,500. The Company opted thereafter
to cancel its debt to OWN rather than collect the $66,500 from OWN (see Note
10). In consideration for these transactions, the Company agreed to lower the
exercise price of 888,666 of the Class A Warrants from $0.56 to $0.15 per share
(see Note 10).
On May 1, 2000, the Company terminated its Agreement with OWN. In connection
with the termination, OWN agreed to exercise 958,521 shares of Class A Warrants
29
<PAGE>
for $175,000 in cash and $51,569 in expense reimbursements and cancel the
remaining 41,479 warrants. OWN also agreed to acquire co-ownership of the
Company's pre-termination customer list for a guaranteed royalty of $40,000,
which has been recorded as other income.
On September 22, 2000, the Company entered into a management agreement with
Beauty Resource, Inc., a Nevada corporation ("BR"). BR is engaged by the Company
to provide and perform for the Company all management services reasonably
necessary for the proper and efficient operation of the Company for a five-year
period. BR personnel currently assigned to manage the day-to-day activities of
the Company include individuals designated as the Company's CEO and COO.
BR will supervise the bookkeeping and accounting services for and on behalf of
the Company. BR will be responsible for all marketing, distribution activities
on behalf of the Company including, but not limited to, determining which
products to market, sales prices, target markets and customers, selecting
distribution methods and procedures and advertising activities. Additionally, BR
will be responsible for all other administrative functions of the Company
including, without limitation, hiring and personnel matters, compensation
arrangements with employees of the Company, selecting outside advisors and
consultants to the Company, choosing vendors and suppliers, selecting and
negotiating banking relationships and all other normal and customary activities
associated with operating a business. BR is entitled to a reimbursement, which
shall be a payment of $15,000 per month. In addition, commencing April 1, 2001
and continuing on the first day of each quarter thereafter during the remaining
term of the agreement, the Company shall pay BR a fee in the amount of 0.5% of
the sales (net of returns and allowances) of the Company for the preceding
quarter.
Upon signing of the agreement, the Company awarded the new CEO options to
purchase 100,000 shares of the Company common stock at an exercise price of
$0.25 per share, to be exercised on or before September 30, 2003.
In addition, as defined in the agreement, BR is entitled to performance options
up to 2,000,000 shares through March 31, 2006 at $0.25 per share based on
achieving certain sales targets, 3,000,000 shares through March 31, 2006 at
$0.25 per share based on achieving certain pre-tax net income levels, and cash
bonuses of up to 5% of pre-tax net income based on achieving certain ratios of
pre-tax net income to sales. To date, no such options or cash awards have been
earned by BR.
NOTE 13 - SUBSEQUENT EVENTS
---------------------------
Subsequent to September 30, 2000, and pursuant to a private placement memorandum
dated September 25, 2000, the Company issued 2,750,000 shares of common stock
valued at $0.25 per share to outside investors for a total of $687,500.
Additionally, subsequent to September 30, 2000, the Company received $300,000 in
unsecured loans bearing interest at 10% per annum from shareholders and an
individual. Principal and interest on these notes are payable on demand.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
30
<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 60 Chairman 1991
Stan R. Wylie 58 Director and Chief 1995
Financial Officer
Alan Goldsberry 48 Director 1995
Marti Wolf 58 President
Gayle Walker 40+ CEO
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 remained as CEO and Chairman.
Concurrent with the signing of the Management Agreement with Beauty Resource on
September 22, 2000, Mr. Riemann resigned as CEO. Mr. Riemann is president of JCR
Enterprises, Inc., which included two Biogime franchise retail locations from
1987 to 1996.
STAN R. WYLIE has been a director of Biozhem since December 1995. On September
28, 2000, he was named Chief Financial Officer. Since March 1995 he has been a
self employed financial consultant. Several related technology companies located
in the Houston and Dallas areas employed Mr. Wylie from 1992 to 1995. Mr. Wylie
was Chief Financial Officer of the Company from 1986 to 1991 and was formerly a
Certified Public Accountant.
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. From 1997 to
1999 Ms. Wolf was president of MW Consulting Group, a marketing strategies and
31
<PAGE>
development firm. From 1990 to 1997, Ms. Wolf served as senior vice president
for Los Angeles-based Kent & Spiegel Direct, a national marketing firm
specializing in direct response television.
GAYLE WALKER was elected CEO on September 22, 2000 concurrent with the signing
of the Management Agreement with Beauty Resource. Since 1996, Ms. Walker has
been President of Beauty Resource, Inc. From 1990 to 1996, Ms. Walker was
President of Desert Beauty Cosmetics, a skin care development and marketing
company.
Board of Directors Meetings and Compensation
--------------------------------------------
During the fiscal year ended September 30, 2000, the Board of Directors
held 3 meetings. All Board members attended all meetings held, either
in person or by telephone.
The Company recorded directors fees of $3,750 for each director for
fiscal year ended September 30, 2000. In lieu of cash payments, each of
the directors agreed to an issuance of 15,000 shares of the Company's
stock valued at $.25 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
three fiscal years ended September 30, 2000 to each of the most highly
compensated officers:
ALL OTHER
PRINCIPAL COMPEN-
NAME POSITION(S) YEAR SALARY BONUS SATION **
---- ----------- ---- ------ ----- ---------
John C. Riemann CEO 2000 $ 0 $ 0 $ 3,750
John C. Riemann President/CEO 1999 $ 79,167 $ 0 $ 2,375
John C. Riemann President/CEO 1998 $ 100,000 $ 0 $ 5,500
Marti Wolf President 2000 $ 100,000 $ 0 $ 0
Stan R Wylie CFO 2000 $ 0 $ 0 $ 3,750
** On September 30, 2000, 15,000 shares of the Company's common stock valued at
$.25 per share were committed to be issued in lieu of cash payment for
director's fees. 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.
32
<PAGE>
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. When Mr.
Riemann was elected CEO concurrent with the cancellation of the OWN
agreement on May 1, 2000, he served at a salary of $0 per year.
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The table set forth below contains certain information, as of September 30,
2000, 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 BENEFICALLY
OWNER RECORD BENEFICIALLY BENEFICIALLY (A) OWNED
------------------------------- -------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
One World Integrated
Technologies, Inc. 1,086,365 0 1,086,365 8.4%
12300 Wilshire Blvd., Ste. 200
Los Angeles, CA 90025
John C. Riemann 1,181,732 (b) 0 1,181,732 9.1%
32238 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Manhattan Financial Group 1,075,000 (c) 0 1,075,000 8.3%
1320 Ocean Dr.
Manhattan Beach, CA 90266
Brian P. Burns 620,000 0 620,000 4.8%
100 Bush Street, Ste. 1250
San Francisco, CA 94104
Steven Ricketts 660,721(d) 0 660,721 5.1%
1972 Green Meadow Lane
Meadow Vista, CA 95722
</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
33
<PAGE>
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.
(b) Includes options to acquire 340,000 shares and 15,000 shares committed to
be issued for director's fees.
(c) Includes warrants to acquire 400,000 shares.
(d) Includes options to acquire 500,000 shares.
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 Common 1,181,732 (b) 9.1%
c/o Biozhem Cosmeceuticals Inc.
32238 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Stan R. Wylie, Director/CFO Common 407,738 (c) 3.2%
15306 Quiet Creek.
Houston, TX 77095
Alan Goldsberry, Director Common 83,625 (d) .6%
12407 Brushy Hollow
Austin, TX 78750
Marti Wolf Common 0
c/o Biozhem Cosmeceuticals Inc.
32238 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Gayle Walker Common 100,000 (e) .8%
c/o Biozhem Cosmeceuticals Inc.
32238 Paseo Adelanto, Ste. A
San Juan Capistrano, CA 92675
Directors, and Executive Common 1,773,095 13.7%
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.
(b) Includes options to acquire 340,000 shares and 15,000 shares committed to
be issued for director's fees. JCR Enterprises, Inc., a company for which
Mr. Riemann is president, owns 345,471 shares of the Company's stock. Mr.
Riemann disclaims beneficial ownership or control of this stock.
(c) Includes options to acquire 240,000 shares and 15,000 shares committed to
be issued for director's fees.
(d) Includes options to acquire 10,000 shares and 15, 000 shares committed to
be issued for director's fees.
(e) Includes options to acquire 100,000 shares.
34
<PAGE>
STOCK TRANSACTIONS INVOLVING MANAGEMENT
None of the directors was, during the past year, a party to any
contract, arrangement or understanding with any person with respect to any
securities of 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, 2000, 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,
Wylie, 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 $112,844 in debt owed
to it by the Company. In consideration, the Company issued 304,930
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)
10.13 Management Agreement between One World Networks Integrated
Technologies, Inc. and Biozhem Cosmeceuticals, Inc. dated July
14, 1999
10.14 Multi-Party Amendment No. 1 to Management Agreement dated July
14, 1999, dated October 13, 1999
10.15 Termination Agreement dated May 1., 2000 terminating Management
Agreement dated July 14, 1999
36
<PAGE>
10.16 License and Supply Agreement dated September 22, 2000 between
Advanced Tissue Sciences, Inc. and Biozhem Cosmeceuticals, Inc.
10.17 Management Agreement dated September 22, 2000 between Beauty
Resource, Inc. and Biozhem Cosmeceuticals, Inc.
(b) Reports on Form 8-K
8-K filed September 22, 2000, detailing Management Agreement
with Beauty Resource, Inc. and License and Supply Agreement
with Advanced Tissue Sciences, Inc.
Subsidiary of Registrant (1)
(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.
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/ Gayle Walker
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Gayle Walker, Chief Executive Officer
Date: January 10, 2001
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By: /S/ Stan R. Wylie
-------------------
Stan R. Wylie, CFO and Chief Accounting Officer
Date: January 10, 2001
-----------------
By: /S/ John C. Riemann
--------------------
John C. Riemann
Director
Date: January 10, 2001
----------------
By: /S/ Alan Goldsberry
--------------------
Alan Goldsberry
Director
Date: January 10, 2001
----------------
By: /S/ Stan R. Wylie
--------------------
Stan R. Wylie
Director
Date: January 10, 2001
----------------
37
