<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended MARCH 31, 1998
----------------------
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______________ to _______________
Commission file number 2844975-1
---------
DEOTEXIS, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 13-3666344
- ----------------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
885 THIRD AVE., SUITE 2900
NEW YORK, NEW YORK 10022-4834
- ----------------------------------------- --------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (212) 829-5698
--------------------
-N/A-
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
----- -----
As of May 14, 1998, there were 4,546,875 shares of the registrant's
Common Stock, par value $.001, outstanding.
<PAGE>
STATEMENT ON INTERPRETATION OF FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements
relating to future events or the projected future financial performance of the
Company. Such forward-looking statements are within the meaning of that term in
Section 27A of the Securities Act and Section 21E of the Exchange Act. When used
herein, the words "anticipate," "intend," "plan," "believe," "in our opinion,"
"hope," "estimate" and "expect," and any similar words or phrases as they relate
to the Company or its operations, are intended to identify such forward-looking
statements. Such statements may include, but not be limited to, projections of
revenues, income or loss, capital expenditures, acquisitions, plans for growth
and future operations, financing needs, sources or potential sources or capital,
or plans or intentions relating to acquisitions by the Company, as well as
assumptions relating to the foregoing. Forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be predicted or
quantified. Future events and actual results could differ materially from those
assumptions and projections set forth in, contemplated by or underlying the
forward-looking statements. Investors are cautioned not to place undue reliance
upon such forward-looking statements contained herein.
<PAGE>
DEOTEXIS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
BALANCE SHEETS AT DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)..... F-2
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 (UNAUDITED) AND CUMULATIVE
SINCE MARCH 6, 1992 (INCEPTION) TO MARCH 31, 1998
(UNAUDITED)............................................................ F-3
STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD
MARCH 6, 1992 (INCEPTION) TO DECEMBER 31, 1994, AND
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED).............. F-4
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 (UNAUDITED) AND CUMULATIVE SINCE
MARCH 6, 1992 (INCEPTION) TO MARCH 31, 1998 (UNAUDITED)................ F-5
NOTES TO CONDENSED FINANCIAL STATEMENTS................................ F-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 1
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................................... 1
PART II OTHER INFORMATION............................................................... 1
ITEM 1. LEGAL PROCEEDINGS............................................................... 1
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................... 1
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................. 1
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS......................................................................... 1
ITEM 5. OTHER INFORMATION............................................................... 1
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................ 8
SIGNATURES............................................................................................ 9
</TABLE>
i
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
Balance Sheets at and December 31, 1997 and March 31, 1998 (unaudited) F-2
Statements of Operations for the three months ended March 31, 1997 and 1998
(unaudited) and cumulative since March 6, 1992 (inception)
to March 31, 1998 (unaudited) F-3
Statement of Stockholders' Equity for the period March 6, 1992 (inception) to
December 31, 1994, and for the years ended December 31, 1995, 1996 and 1997
and for the three
months ended March 31, 1998 (unaudited) F-4
Statements of Cash Flows for the three months ended March 31, 1997 and 1998
(unaudited) and cumulative since March 6, 1992
(inception) to March 31, 1998 (unaudited) F-5
Notes to Condensed Financial Statements F-6
</TABLE>
F-1
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and equivalents $4,034,700 $3,713,888
Prepaid taxes 1,561 1,561
Prepaid insurance 105,802
----------- ----------
Total assets (all current) $4,036,261 $3,821,251
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 73,097 $ 274,246
Due to officer 150,787 150,787
----------- ------------
Total current liabilities 223,884 425,033
----------- ------------
Commitments and other matters
Stockholders' equity:
Preferred stock, par value $.001; authorized
15,000,000 shares, none issued and outstanding
Common stock, par value $.001; authorized
75,000,000 shares, issued and outstanding
4,546,875 shares 4,547 4,547
Additional paid-in capital 4,155,485 4,155,485
Deficit accumulated during the development
stage (347,655) (763,814)
----------- -----------
Total stockholders' equity 3,812,377 3,396,218
----------- -----------
Total liabilities and stockholders'
equity $4,036,261 $3,821,251
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
F-2
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS MARCH 6, 1992
ENDED MARCH 31, (Date of Inception) to
----------------------
1997 1998 MARCH 31, 1998
---------- ---------- ------------------
Interest and other income $ 6,188 $ 21,971 $ 113,369
-------- -------- ---------
Expenses:
<S> <C> <C> <C>
Consulting 3,750 38,125
Rent 3,750 38,125
Corporation franchise taxes 431 9,200 16,736
Filing fees 778 70,301 91,584
Amortization 17 500
Bank charges 75 2,310
Insurance 35,268 35,268
Office 10,610 28,762
Professional fees 1,050 312,751 625,773
-------- --------- ---------
Total expenses 9,851 438,130 877,183
-------- --------- ---------
Net loss $(3,663) $(416,159) $(763,814)
======= ========= =========
Basic loss per share $(.01) $(.09)
===== =====
Weighted average number of
shares outstanding 278,750 4,546,875
======= =========
</TABLE>
SEE ACCOMPANYING NOTES
F-3
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON ADDITIONAL DURING THE TOTAL
STOCK PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
-------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of 160,000 common shares on June 4,
1992 at par value ($.001 per share) for
cash ($.01 per share) 160,000 $ 160 $ 1,440 $1,600
Sale of 18,750 shares for cash in July 1992
($1.60 per share) 18,750 19 29,981 30,000
Net loss inception to December 31, 1992 $ (62) (62)
Net loss - December 31, 1993 (1,766) (1,766)
Sale of 100,000 shares - January 31, 1994
($6.25 per share) 100,000 100 624,900 625,000
Deferred offering costs charged to paid-in
capital (31,461) (31,461)
Net loss - December 31, 1994 (27,184) (27,184)
------- ------------ ---------- -----------
Balance - December 31, 1994 279 624,860 (29,012) 596,127
Net loss (35,005) (35,005)
------- ------------ ---------- ----------
Balance - December 31, 1995 279 624,860 (64,017) 561,122
Net loss (43,737) (43,737)
------- ------------ ---------- ----------
Balance - December 31, 1996 279 624,860 (107,754) 517,385
Distributions (475,750) (475,750)
Sale of 4,183,125 shares for cash
($.96 per share) 4,183,125 4,183 3,995,817 4,000,000
Issuance of 85,000 shares for services
rendered ($.48 per share) 85,000 85 (85) -
Capital contributed by principal
stockholder 10,643 10,643
Net loss (239,901) (239,901)
--------- ----- --------- --------- -----------
Balance - December 31, 1997 4,546,875 4,547 4,155,485 (347,655) 3,812,377
Net loss (unaudited) (416,159) (416,159)
--------- ----- --------- --------- -----------
Balance - March 31, 1998 (unaudited) 4,546,875 $4,547 $4,155,485 $(763,814) $3,396,218
========== ====== ========== ========= ==========
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS MARCH 6, 1992
ENDED MARCH 31, (Inception) through
-------------------------------
1997 1998 MARCH 31, 1998
------------ -------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(3,663) $(416,159) $(763,814)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Amortization 17 500
Changes in operating assets and
liabilities:
Loan receivable -0- -0-
Prepaid taxes -0- -0- (2,061)
Prepaid insurance (105,802) (105,802)
Accounts payable and accrued
expenses 6,543 201,149 274,246
Due to officer 150,787
------------ ---------- ---------
Cash (used in) provided by operations 2,897 (320,812) (446,144)
Cash flows from financing activities:
Issuance of common stock -
net of costs 4,625,139
Capital contributed by principal
stockholder 10,643
Distributions (475,750)
--------- ---------- ---------
Net (decrease) increase in cash
and cash equivalents 2,897 (320,812) 3,713,888
Cash and cash equivalents -
beginning of period 530,337 4,034,700 -
--------- ----------- ---------
Cash and cash equivalents -
end of period $533,234 $3,713,888 $3,713,888
======== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $9,200 $9,200
========== ==========
Noncash financing activities:
The Company issued 85,000 shares to a
consultant for services rendered.
The Company recorded the fair market
value of those securities at $.48 per share. $40,800
=======
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY AND STOCKHOLDERS' EQUITY:
Background:
Deotexis, Inc. (the "Company") was organized under the laws of the State
of Nevada on March 6, 1992. Its purpose is the development of a consumer
products company focusing on the marketing of personal care consumer
products. Since the Company has not yet begun operations, it is
considered to be in the development stage.
On October 10, 1997, the Stock Purchase Agreement dated September 30,
1997 among Overton Holdings Limited, a corporation formed under the laws
of the Turks & Caicos Islands, British West Indies ("OHL"), Gary Takata,
Shigeru Masuda and Gerold Tebbe, closed. Pursuant to the terms of the
Stock Purchase Agreement, the Company issued 4,183,125 newly issued and
nonregistered shares of common stock, $.001 par value (the "New Shares")
to OHL, in return for a cash payment to the Company of $4 million from
OHL, and the transfer to the Company for nominal consideration, plus
future royalties tied to the revenues recognized by the Company from the
commercial exploitation thereof, of certain patents, patent applications
and related intellectual property owned by Gerold Tebbe or entities owned
and controlled by him. OHL is 100% beneficially owned by Gerold Tebbe.
The Company intends to develop and market these patents and the products
produced utilizing this intellectual property.
The New Shares account for 92% of the issued and outstanding common stock
of the Company and, accordingly, the Company is a subsidiary of OHL.
Prior to the closing of the Stock Purchase Agreement, Gary Takata, then
President, Secretary and a Director of the Company, and Shigeru Masuda,
then Chairman of the Board of Directors of the Company, together
beneficially owned 55.2% of the common stock of the Company and
controlled the Company. Upon the closing of the Stock Purchase Agreement
and in accordance with the provisions thereof, Mr. Masuda resigned as a
Director of the Company, and Mr. Takata resigned his officerships and
directorship with the Company and appointed Gerold Tebbe sole director,
who then appointed himself President, Treasurer and Secretary of the
Company.
F-6
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On October 13, 1997, by action by written consent without a meeting, OHL,
as majority stockholder and parent of the Company, acted to amend the
Company's Articles of Incorporation to change the Company's corporate
name to "Deotexis, Inc." An amendment to the Company's Articles of
Incorporation was prepared and filed with the Secretary of State of
Nevada on October 15, 1997.
Basis of Presentation:
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
management of the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the condensed notes
thereto. In the opinion of management of the Company, the accompanying
unaudited condensed financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary to fairly
present the results for the interim periods to which these financial
statements relate.
These financial statements should be read in conjunction with the
Annual Report filed with the Securities and Exchange Commission on
Form 10-K.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash and Equivalents:
Cash and equivalents are stated at cost plus accrued interest. Cash
equivalents consist of short-term treasury bills. The Company considers
all highly liquid investments with a maturity date of three months or
less to be cash equivalents.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Earnings (Loss) Per Share:
Basic earnings (loss) per share excludes dilution and is computed by
dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding for the period.
There were no dilutive securities outstanding during any of the periods.
Patents:
In accordance with the Stock Purchase Agreement, the majority shareholder
sold certain patents, patent applications and associated intellectual
property to the Company for nominal consideration. The cost of these
acquired patents are not being amortized as the consideration was
nominal. These patents involve textile-based controlled-release delivery
systems, with product applications in toiletries, cosmetics, apparel,
household products and personal care products markets as well as
applications in the pharmaceutical industry.
3. STOCKHOLDERS' EQUITY:
The Company is authorized to issue 75,000,000 common shares with a par
value of $.001, and 15,000,000 blank check preferred shares with a par
value of $.001. On June 4, 1992, the Company issued a total of 160,000
shares of its common stock to its officers for a total consideration of
$1,600 ($.01 per share).
On June 4, 1992, the Board of Directors authorized the sale, through a
self-underwritten initial public offering, of a minimum of 100,000 common
shares and a maximum of 200,000 common shares at $6.25 per share.
During the period of July 1, 1992 through July 15, 1992, the Company
issued a total of 18,750 shares of its common stock ($.001 par value) to
various individuals for a total consideration of $30,000 ($1.60 per
share).
On January 14, 1994, the Company closed on the minimum of 100,000 shares
in its initial public offering for a total consideration of $625,000.
In October 1997, the Company distributed $475,750 of which $454,000 or
$4.54 per share was distributed to the holders of 100,000 common shares
issued in connection with the initial public offering, and $21,750 or
$1.16 per share was distributed to holders of 18,750 common shares issued
prior to the initial public offering.
F-8
<PAGE>
DEOTEXIS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On October 10, 1997, pursuant to the Stock Purchase Agreement dated
September 30, 1997, the Company issued 4,183,125 newly issued and
nonregistered shares of common stock, $.001 par value, in exchange for a
cash payment of $4 million and the transfer to the Company for nominal
consideration, plus future royalties tied to the revenues generated by
products sold that employ certain patents, patent applications and
related intellectual property contributed to the Company by the Company's
principal stockholder. In addition, the principal stockholder contributed
capital in the amount of $10,643.
On October 10, 1997, the Company issued 85,000 shares of Common Stock to
a consultant, in connection with his work on behalf of the Company, in
arranging and facilitating the consummation of the Stock Purchase
Agreement. The Company recorded the estimated fair market value of those
securities at $.48 per share by a charge to additional paid-in capital.
4. COMMITMENTS AND OTHER MATTERS:
On April 9, 1998 the Company entered into a nonexclusive licensing
agreement, with Kuw Hummel Vertribs Gmbh ("Hummel") to manufacture and
sell certain products in Germany. The agreement is for a term of one year
and shall be automatically renewed. Hummel is owned 49.2% by Gerold
Tebbes' wife.
During the three months ended March 31, 1998, the Company accrued costs
of approximately $107,000 for consulting services provided to the Company
by a director of the Company.
F-9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
See Part II, Item 5 -- Other Information, below.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Quarterly Report.
RESULTS OF OPERATIONS
Deotexis, Inc. (the "Company") has not generated any revenue from
operations and is in the development stage. At March 31, 1998, the Company had
current assets of $3,821,251, and current liabilities of $425,033.
PLAN OF OPERATIONS
RECENT DEVELOPMENTS
AGREEMENT WITH KUW HUMMEL VERTRIEBS GMBH. Since 1993, until very
recently, the Company has had an informal oral agreement with KuW Hummel
Vertriebs GmbH ("Hummel"), a small manufacturing and distribution company in
Germany, to produce certain of the Company's Products, primarily the Deotexis
Cold Scarf, in the small quantities that have been required to date for
test-marketing
1
<PAGE>
and promotional purposes. The products have been manufactured on machinery the
development and customization of which has, to date, been financed by Mr. Tebbe.
On April 9, 1998, the Company and Hummel executed a License
Agreement (the "Hummel License"), which provides for the following basic terms.
The Hummel License grants to Hummel a non-exclusive license for Hummel to
manufacture and distribute certain of the Company's Products in the Federal
Republic of Germany only. The license grants to Hummel the right to use Company
patents relating to the Deotexis Cold Scarf and other products based on it, but
licensing arrangements between the Company and Hummel with respect to other
Company Products will be the subject of separate licensing agreements. Hummel
has the right to use the Deotexis name in its selling efforts, and is entitled
to receive, without payment of any additional fee, all improvements on existing
products and techniques developed by the Company that relate to the licensed
products. The Hummel License obligates Hummel to contribute to the marketing and
sales efforts with respect to the licensed products it manufactures, including
supporting the launch and distribution of the Products with advertising and the
distribution of literature describing the Products, and exhibiting the Products
at trade fairs in Germany. Deotexis products manufactured and sold by Hummel
have to meet quality standards specified by the Company, and the Company has the
right to verify quality at all times. In return for the grant of the Hummel
License by the Company described above, Hummel has paid to the Company a
one-time fee of DM 10,000. In addition, Hummel will pay to Deotexis under the
Hummel License a licensing fee equal to 8% of the Net Profits generated by the
sale of the licensed products, if such Net Profits are DM 5 million or less; if
such Net Profits exceed DM 5 million but are less than DM 10 million, the
licensing fee shall equal 7% of Net Profits; if such Net Profits exceed DM 10
million but are less than DM 20 million, the licensing fee shall equal 6% of Net
Profits; and if such Net Profits exceed DM 20 million, the licensing fee shall
equal 5% of Net Profits. Regardless of the Net Profits realized by Hummel under
the Hummel License, Hummel shall pay to the Company a minimum annual licensing
fee equal to DM 20,000 (which amount shall be pro-rated for any portion of a
year that the Hummel License is in effect). "Net Profits" are defined in the
Hummel License as the total invoice price rendered by Hummel to its customers
for the Products, less (A) trade discounts granted by Hummel and reflected on
the invoice, (B) sales taxes, excise duties, charges for taking part in the
German recycling program, and use taxes, (C) reimbursements by customers, and
(D) reimbursements by customers of the travel expenses incurred by Hummel
employees while working on a customer order, but only to the extent that a
customer is actually invoiced for these amounts. Hummel is not permitted to
assign its rights under the Hummel License. The duration of the license is for
one (1) year, renewable automatically for an additional year unless either party
gives the other ninety (90) days notice of its intention not to renew, or unless
a party has breached its obligations under the agreement. The Hummel License is
governed by German law.
The Hummel License provides that the Company may terminate the
license granted therein if it decides in the future to grant a license or
exclusive license to a large consumer products or pharmaceutical concern, at the
Company's discretion. Thus, the Hummel License does not in any way restrict the
Company's right to grant licenses to others to manufacture and distribute its
Products in the future, nor does it restrict or prevent in any way the
acquisition that the Company hopes to accomplish of a manufacturing and
distribution company located in the United States or Europe.
GENERAL OVERVIEW
The Company was incorporated in Nevada on March 6, 1992, has no
operating history, has not generated or recognized any revenues, and is in the
development stage. The Company was originally organized with the sole purpose of
identifying a suitable candidate to acquire or with which to merge, and its
existence had, until October, 1997, been maintained since its formation with
that objective in mind. On September 30, 1997, the Company, then known by its
former name, Zeron Acquisitions II, Inc. ("Zeron"), and Zeron's two controlling
stockholders at the time, entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") with Mr. Gerold Tebbe and Overton Holdings Limited, a Turks
& Caicos Islands corporation wholly beneficially owned and controlled by Mr.
Tebbe ("OHL"), pursuant to which OHL agreed to buy 4,183,125 newly-issued and
non-registered shares of Common Stock, $.001 par value per share, of the
Company, in exchange for (i) $4,000,000 in cash from OHL, and (ii) the
contribution to the Company by Mr. Tebbe, or entities owned or controlled by
him, of certain patents, patent applications and associated intellectual
property, in return for nominal consideration and a
2
<PAGE>
reservation of a 1% royalty by Mr. Tebbe on all net income recognized by the
Company from the commercial exploitation of such rights. The Stock Purchase
Agreement closed on October 10, 1997.
The creative and technical expertise behind the Company's
business is provided by Mr. Gerold Tebbe, who is a qualified textile designer
with over twenty-five years of experience in the German and international
textile industries. In the 1970s, Mr. Tebbe's company became a leader in the
process of transferring complex designs from the artist's drawing board onto
high-volume production machines for the manufacture of patterned cloths. In the
1980s, reacting to the competitive threat to the European textile industry from
low-cost imports from Asia and other low labor cost regions, Mr. Tebbe began to
seek an alternative to his existing business. After experimenting with
textile-based controlled-release delivery systems, he developed the product line
the Company currently intends to sell, which he started to test-market on a
preliminary basis in the late 1980s. At that point, a dispute arose over the
validity of the patents and other intellectual property employed to produce the
products the Company currently intends to market. That patent dispute was
resolved in Mr. Tebbe's favor by the European Patent Office in late 1996.
The Company intends to create an organization staffed by suitably
qualified executives to support Mr. Tebbe. Initially, the Company plans to
generate revenues by (1) using an acquired operating company in Europe or the
United States to supply product to customers who do not have the ability to
license the technology and manufacture the Company's products themselves; and
(2) licensing the technology and processes required to manufacture the Company's
products to consumer products manufacturing and distribution companies in return
for a licensing fee. The Company plans to appoint Senior Product Managers to
take responsibility for sales and licensing agreements with potential customers.
The Company anticipates that the Product Managers will have experience in the
licensing business. In addition, the Company hopes to acquire an operating
company with a management team in place in Europe or the United States. The
Company anticipates that the Product Managers will either be employees of such
an acquired company or members of the newly-hired management the Company will
put in place as it proceeds to expand its operations. While the Company has had
preliminary discussions with several wholesale distributors and potential
licensees, there can be no assurance that licensing agreements will be reached
with those entities, or any others, on terms advantageous to the Company, if at
all. In addition, though the Company has had preliminary discussions with a few
operating companies that may be potential acquisition candidates, there can be
no assurance that the Company will be able to identify a suitable company for
acquisition in the United States, Europe, or any other location or, if such an
entity is identified, that the Company will be able to complete such an
acquisition on favorable terms. In the event the Company does not succeed in
entering into licensing agreements and consummating an acquisition within its
first six to twelve (6-12) months of operations, the Company's ability to
produce and distribute its products and introduce them into the market in any
significant way will be extremely limited.
The Company's plan is to develop and commercialize certain
patented, textile-based controlled-release delivery systems for consumer
products in certain sectors of the toiletries, cosmetics, apparel, household
products and personal care products markets. The Company's goal is to build on
its patented "know-how" in research and development, and to acquire
manufacturing and marketing resources to become a profitable supplier of
textile-based, controlled-release delivery systems to a wide range of industry
sectors. The Company believes that its controlled-release delivery systems are
unique in the way they combine microencapsulation technology with flexible
fleece-type fabrics. The Company's first controlled-release delivery system was
developed by Mr. Tebbe in 1987, and he filed a patent application for the
technology relating thereto in that same year. The application was opposed in
the European patent courts by The Procter & Gamble Company, one of the world's
largest manufacturers and distributors of household and consumer products. In
late 1996, the European Patent Office dismissed Procter & Gamble's challenge in
favor of Mr. Tebbe's patent claims.
During its first three (3) years of operations, the Company
anticipates that it will (a) either hire additional senior management necessary
to operate the Company, or acquire an operating company with an existing
management team, or pursue a combination of these strategies, (b) acquire an
operating company in Europe or the United States to manufacture or to oversee
the sub-contracted manufacture and the distribution of its Products; (c) enter
into one or more distribution agreements with one or more major drug and
pharmaceutical wholesale distributors, (d) enter into licensing agreements
providing for the use
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by licensees of the Company's patents and manufacturing technology in exchange
for a sales-based royalty payment to the Company, and (e) commence an image
building advertising and public relations campaign in the personal care products
industry. There can be no assurance that any or all of these goals will be
achieved by the Company.
PRODUCTS
The Company's technology was developed by Mr. Tebbe in Europe,
where several products are now ready for further test-marketing and commercial
launch by the Company. These products include: (1) the "Deotexis Deodorant
Patch," a small, disposable adhesive patch which is designed for quick and easy
attachment to any type of clothing, for use as a controlled-release
anti-perspirant and deodorant; (2) the "Deotexis Perfume Patch," a small,
disposable adhesive patch designed for easy and unobtrusive attachment to the
inner surface of clothes, for controlled-release of perfume; and (3) the
"Deotexis Cold Scarf," a disposable scarf impregnated with herbal substances for
use by persons seeking relief from the symptoms of colds and congestion. These
three products are collectively referred to herein as the "Products." The
Company anticipates, and its test production and marketing support this
intention, that the Products will be competitively priced in relation to
alternative products employing traditional delivery systems. The Products will
be sold as over-the-counter items and not as prescription medications. The
Company's research and development and marketing strategy will be to avoid
marketing any products requiring resource-intensive Food and Drug
Administration-type approvals.
The Company believes that the Products address the problem of
effectively maintaining personal freshness for extended time periods. The
Products are intended to serve as substitutes for perfumes, toiletries,
cosmetics, deodorants, emollients, decongestants and other personal care
products marketed with traditional delivery systems. Products employing
traditional delivery systems (powders, roll- ons, creams, sprays, etc.), in the
Company's view, can be inconvenient to use and, after application, rapidly
deteriorate and lose their efficacy. The Company's Products are intended to
provide for the controlled-release of active substances in desired quantities
over an extended period of time, thereby providing a superior delivery system
that avoids the "peak and valley" effect resulting from use of traditional
delivery systems currently on the market. The Company intends to market the
Products as an alternative to similar consumer products employing traditional
delivery systems, with the advantage of extended active substance effectiveness,
and the convenience of a no-mess, no-spill solution to consumers' personal care
needs.
TARGET MARKETS; MANUFACTURING AND DISTRIBUTION STRATEGY
Potential customers for the Company's products are consumers
worldwide. Test- marketing in Europe has shown significant interest in the
Deotexis Cold Scarf, based on its convenience, versatility and
cost-effectiveness. The Company's marketing and product strategy reflects Mr.
Tebbe's considerable experience with the test-marketing of the Company's
Products and is designed to be responsive to the requirements of consumers and
the marketplace. To reach its target markets, the Company intends to focus on
two categories of sales channels : (1) wholesale distributors to drugstores and
pharmacies; and (2) licensees, which are expected to be large and medium-sized
corporations in the toiletries, cosmetics, apparel, household products and
personal care products markets. The Company has had preliminary discussions with
several major companies in both categories and believes it will be in a position
to conclude sales and licensing agreements promptly after concluding its
corporate organization and staffing, though there can be no assurance that any
such contracts or agreements will be consummated. In addition, the Company has
executed an agreement with the German distributor, KuW Hummel Vertriebs GmbH
("Hummel"), the company that has been manufacturing and distributing the
Deotexis Cold Scarf during the test-marketing phase of operations, pursuant to
which Hummel will continue to manufacture and distribute the Deotexis Cold Scarf
in return for payment of licensing fees and royalties to the Company.
The Company's marketing plan anticipates that some potential
customers will require products manufactured by the Company or a Company
sub-contractor. The Company therefore hopes to acquire an operating company with
manufacturing capabilities in Europe or the United States within the first six
to twelve (6-12) months of its operations, and thereafter use the Company's
Products to diversify and expand the acquired company's sales. The Company's
marketing plan further anticipates that other
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customers will enter into licensing agreements with the Company, under which, in
return for a sales-based royalty payment to the Company, licensees will be
entitled to the use of the Company's intellectual property to manufacture and
distribute the Products.
RETENTION OF SENIOR MANAGEMENT
At the present time, seven directors have been appointed to the
Company's Board of Directors. Mr. Gerold Tebbe will serve as the President,
Chief Executive Officer and a Director of the Company, with overall
responsibility for operations. Mr. Tebbe will also serve as the Company's
Secretary and Treasurer until such time as suitable personnel can be retained to
serve in those positions. Additional senior management of the Company to be
recruited over the course of the next six to twelve (6-12) months as the Company
finalizes its corporate organization and structure, are:
HOLDING COMPANY STAFF. To support Mr. Tebbe, the Company expects
to appoint a seasoned financial executive who will be responsible (assuming the
strategic acquisition, discussed below, occurs) at the holding company level for
accounting, consolidations, finance, cash management, regulatory and securities
law compliance, and other holding company functions.
MANAGEMENT OF TO-BE ACQUIRED OPERATING COMPANY. It is the
Company's intention, within the first six to twelve (6-12) months of its
operations, to acquire an operating company in Europe or the United States and
employ the management of that operating company. The Company anticipates that it
will employ most, if not all, of the members of the operating company's
management team. If such an acquisition is consummated, however, the Company
reserves the right to replace some or all of the personnel of the acquired
company if, in the Company's opinion, better qualified or differently qualified
individuals are necessary or desirable to manage the Company's operations.
PRODUCT MANAGERS. As stated above, the Company intends to acquire
an operating company with manufacturing capabilities in Europe or the United
States within the first six to twelve (6-12) months of its operations, and
thereafter use the Company's Products to diversify and expand the acquired
company's sales. To manage sales of the Company's Products, the Company may
either employ the existing product and sales managers of the acquired company's
management, or hire new Product Managers, or both. It is anticipated that
initially there will be two (2) Senior Product Managers, based in Europe and the
United States, respectively, with responsibility for negotiating and completing
sales and licensing agreements with potential customers in their respective
geographical areas. The Product Managers will be selected based on their
experience in the areas of sales of consumer and personal care products, and the
licensing of technology and patents.
MANUFACTURING AND DISTRIBUTION
The Company's target markets are different and independent, and
will require separate licensing and distribution strategies. The Company
believes it can most effectively manufacture and distribute its
controlled-release Products (including products in development, which currently
consist of consumer insect repellent, treatment gloves and field dressings) by
(i) acquiring an operating company in Europe or the United States with a
suitable production facility and management, and transferring the Company's
manufacturing technology and intellectual property to this acquired entity, (ii)
entering into agreements with drug and pharmaceutical wholesale distributors to
distribute the Company's Products through those companies' distribution
networks, specifically to pharmacies and drugstores that purchase their
over-the-counter products from the wholesale distributors; and (iii) licensing
the technology and the processes required to manufacture the Company's Products
to consumer products manufacturing and distribution companies, in return for a
licensing fee, which companies would, in turn, manufacture and distribute the
Company's Products. The Company anticipates that it will be able to negotiate
both an acquisition agreement and at least one licensing or distribution
agreement during its first six to twelve (6- 12) months of operations. While the
Company has had preliminary discussions with several wholesale distributors and
potential licensees, and a few operating companies that may be potential
acquisition candidates, there can be no assurance that such an acquisition will
occur or such contemplated agreements will be reached on terms advantageous to
the Company, if at all. In the event the Company does not succeed in entering
into these licensing and distribution agreements, and consummating an
acquisition,
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within the time-frame referred to above, the Company's ability to produce,
distribute and market its Products in any significant way will be extremely
limited.
LICENSING
Until the Company is able to acquire an operating concern in
Europe or the United States, and for the foreseeable future if the Company is
unable to consummate such an acquisition, and to avoid the typically large costs
of advertising and promoting new consumer products, the Company plans to
primarily follow a licensing strategy to market and distribute its Products.
The Company anticipates that many of its customers will enter
into license agreements with the Company, in return for a sales-based royalty
payment to the Company. It is the Company's intention to grant five (5) year
licenses (extendable to ten (10) years), to large and mid-sized corporations in
the apparel, cosmetics, toiletries, household products and personal care
products industries. In return for the licensing fee paid to the Company,
licensees will be granted the right to use the Company's patents, patent
applications and the related intellectual property necessary to manufacture and
distribute the Company's Products.
To provide the Company's Products with efficient and effective
distribution channels, and also to open up additional market penetration
possibilities, the Company anticipates that it will enter into agreements with
drug and pharmaceutical wholesale distributors to distribute the Company's
Products through those companies' distribution networks, specifically to
pharmacies and drugstores that purchase their over-the-counter products from the
wholesale distributors. The Company anticipates that it will pay these
distributors a fee for the use of their distribution structure, either in the
form of a flat fee per unit of the Company's Products sold, or a fee based on a
percentage of the Product's wholesale price.
There can be no assurance that any license or distribution
agreements will be consummated on terms favorable to the Company, if at all. The
Company's failure to effect such arrangements to license and distribute its
Products will severely limit the Company's ability to produce and distribute its
Products and introduce them into the market in any significant way.
PUBLIC RELATIONS; ADVERTISING
Following the employment of senior management and other staff and
the finalization of its corporate organization and staffing, the Company intends
to begin a public relations campaign to build the image of the Company in a
number of its markets in Europe. The public relations campaign will be designed
to present the Company as a developer and supplier of quality, innovative,
economical controlled- release products. This campaign, which the Company
anticipates will utilize the services of independent public relations firms
selected by the Company, may include (i) the offering of free introductory
samples or gifts of the Company's Products through television, radio and print
ads; (ii) participation in trade fairs in a number of markets in Europe; and
(iii) placement of news articles and coverage in the media. The Company
estimates that the cost of this initial public relations campaign could amount
to a significant percentage of the Company's initial revenues.
The Company's advertising strategy includes corporate
advertising, advertorials, and tactical advertising efforts. The Company's
advertisements will highlight the convenience and economy of the Company's
Products. The Company intends to place its print advertisements in periodicals
and newspapers with readership demographics consistent with the Company's core
consumer target markets.
POTENTIAL PHARMACEUTICAL APPLICATIONS FOR THE COMPANY'S TECHNOLOGY
The Company's patented processes and proprietary technology
(known as "sustained," "programmed," "prolonged" or "timed" release systems in
the pharmaceutical industry), may have wide applications for new products in the
pharmaceutical industry, particularly in the areas of diagnostic and drug
delivery systems. Controlled-release drug delivery systems are designed to
reduce the required frequency of effective drug administration, decrease dosage
quantities, and permit concentrated treatment of a specific area or organ,
without the necessity of medicating the entire body.
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Since the beginning of the development of the Company's
technology, Mr. Tebbe and the Company have followed developments in the
pharmaceutical industry for controlled-release delivery systems, and based upon
informal consultations with industry specialists in the European pharmaceutical
market, the Company believes its patents may cover areas and applications which
are or may be of considerable interest to several pharmaceutical companies. If
these potential applications appear promising, the Company intends to license
its technology to these companies for use in their controlled-release and
diagnostic systems, in return for a sales-based royalty payment. The Company
continues to closely follow and assess developments in this field, and intends
to capitalize on any opportunities to incorporate the Company's technology into
these systems. There can, however, be no assurance that any applications for the
Company's technology in the pharmaceutical area will be developed, and if
developed, that such products will gain the necessary regulatory approvals.
Moreover, even if any products developed using the Company's technology gain the
required regulatory approvals, there can be no assurance that any such products
will be marketed by the pharmaceutical companies, and if marketed, will prove to
be profitable.
PATENTS
The Company currently owns the patents and patent rights that
were previously owned by Mr. Tebbe, and/or entities owned and controlled by him,
and were transferred to the Company in connection with the consummation of the
transactions contemplated by the Stock Purchase Agreement. Such patents and
related intellectual property constitute all of the technology necessary to
manufacture the Company's Products. It is the Company's intention to
commercially exploit the patents through the introduction and sale of the
Company's Products, primarily into the European market. In exchange for the
transfer to the Company of the patents, patent rights and related intellectual
property, the Company has agreed to pay Mr. Tebbe a 1% royalty per annum of all
net revenues recognized by the Company in connection with the commercial
exploitation of the patents and patent rights. There are no assurances that the
Company will ever achieve net revenues as a result of such commercial
exploitation. Furthermore, if the occasion arises, the Company will have to
defend against and/or institute patent infringement suits in order to protect
its proprietary rights to the patents. Prosecution of any type of patent
litigation or dispute may result in significant expenses for the Company.
LIQUIDITY
Since its incorporation on March 6, 1992, the Company has had
no business activity other than its capital raising activities, activities
relating to its corporate organization, and activities relating to the
transfer to the Company by Mr. Tebbe and/or entities owned and controlled by
him of the patents and other intellectual property necessary to produce the
Products. On March 31, 1998, the Company had $3,821,251 of liquid assets,
working capital of $3,396,218 and shareholders' equity of $3,396,218. The
Company has not manufactured or licensed any of its Products since inception;
however, the Company has arranged for a manufacturing and distribution
company based in Germany, KuW Hummel Vertriebs GmbH ("Hummel"), to
manufacture and distribute small quantities of the Company's Products in
connection with test-marketing and promotional activities, and the Company
has executed a Licensing Agreement with Hummel to continue producing Products
for the Company to meet anticipated demand over the next six to twelve (6-12)
months.
CAPITAL RESOURCES
The Company currently has cash on hand sufficient to finance the
operation of its proposed personal care products business, based on the
Company's current business plan and excluding the costs of any planned
acquisitions, for the next one to three (1-3) years. Thereafter, the Company
anticipates meeting its working capital needs through internally-generated cash
flow and a working capital line of credit to finance its operations. There can
be no assurance that the Company will be able to maintain its business and
operations without additional financing during the first one to three (1-3)
years of operations, or that, thereafter, the Company will be able to generate
sufficient cash flow, or secure a working capital line of credit, in an amount
sufficient to finance its anticipated needs or on acceptable terms.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
10 Licensing Agreement, dated April 9, 1998, between the Company and
KuW Hummel Vertriebs GmbH.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the period
covered by this Quarterly Report on Form 10-Q.
1. Form 8-K of the Company dated January 28, 1998.
2. Form 8-K/A of the Company dated February 5, 1998, amending the Form
8-K dated January 28, 1998.
3. Form 8-K of the Company dated March 26, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEOTEXIS, INC.
By: /s/ Gerold Tebbe
--------------------------------
President, Chief Executive Officer,
Secretary and Treasurer
Dated: May 19, 1998
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EXHIBIT INDEX
EXHIBIT PAGE NUMBER
10. Agreement, dated April 9, 1998
between the Company and KuW
Hummel Vertriebs GmbH __
27. Financial Data Schedule __
<PAGE>
Exhibit 10
TRANSLATION FROM GERMAN
RIGHT TO USE BASED ON PRIOR USE WITH REGARD TO TEST MARKETING
UNTIL A FOREIGN PATENT LICENSING AGREEMENT IS GRANTED
A. BACKGROUND
The company KuW Hummel Vertriebs, Schillerstrasse 2 in
D-88525 Durmentingen, of which Mr. Tebbe's wife holds a share of 49.2%,
represented by Mr. Werner Hummel, CEO of KuW Hummel Vertriebs GmbH - hereinafter
referred to as "Hummel" -
And
Deotexis, Inc., 885 Third Avenue, Suite 2900, New York, NY 10022-4834,
represented by Mr. Gerold Tebbe, President and Vice Chairman of the Board of
Directors - hereinafter referred to as "Deotexis" -
1. The "herbal scarf" (a scarf impregnated with microencapsuled natural active
ingredients for soothing the symptoms of a common cold) was Mr. Tebbe's
first patented product which was introduced to the market as a trial.
"Hummel" carried out the trial market introduction in Germany. There was no
written contract/agreement made between Deotexis and Hummel to regulate
this test marketing.
2. Hummel invested in the purchase and development of manufacturing machines
(rewinding machine, low pressure spraying system, textile cutting machine
and fully automated packaging machine). These machines are located either
on Hummel's site or in the premises of the company that delivered them.
3. The test marketing phase for the herbal scarf is now completed and Mr.
Tebbe takes the next steps towards commercial use of his patented
technology. For this purpose he acquired controlling (equity) participation
in an OTC-coded company in the U.S., increased its capital, changed its
name to "DEOTEXIS
<PAGE>
INC." and transferred the Deotexis master patents (which used to be his
personal property) to that company.
4. The licensor is the owner and person authorized to dispose of over 13
patents granted or applied for and a number of country-specific patents,
which Mr. Tebbe brought into a public company in the U.S..
5. Since the Deotexis patent right are now in the possession of a public
company in the U.S., it is necessary to place the relationship between
Deotexis, Inc. and Hummel on a formal basis. For this purpose it is
proposed that Deotexis and Hummel sign an agreement on [the right of use
based on] prior use.
B. AGREEMENT ON THE RIGHT TO USE BASED ON PRIOR USE
1. Deotexis does not guarantee the extent and validity of its patents and
trademarks/brands, WITH THE EXCEPTION OF HOW THEY ARE DESCRIBED IN THE
AGREEMENT. DEOTEXIS DOES NOT GIVE ANY WARRANTIES AND GUARANTIES OF ANY
KIND, NEITHER EXPRESSLY NOR IMPLICITLY, INCLUDING, BUT NOT LIMITED TO
GUARANTEES OF MARKETABILITY, SUITABILITY FOR A CERTAIN PURPOSE NOR FOR THE
VALIDITY OF PATENT CLAIMS AND TRADEMARKS GRANTED OR APPLIED FOR.
2. The parties of this Agreement shall be Deotexis, Inc. in 885 Third Avenue,
Suite 2900, New York, NY 10022-4834 (licensor) and KuW Hummel Vertriebs
GmbH, Schillerstrasse 2, D-88525 Durmentingen (licensee).
3. The license shall cover the following patents: 0 33 733 (Europe),
PCT/EP87/00724 (world wide), S.N. 363 512 (U.S.A.) and 63-501129 (Japan)
(the "patent rights"). The main product in this category is the Deotexis
herbal scarf and other products based on it (the "licensed products"). All
other Deotexis products shall be subject to separate licenses.
4. Hummel is granted the license for both manufacturing and sales of the
Deotexis products only for as long as Deotexis does not grant a license or
exclusive license to a large customer of their choice.
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5. Hummel does not have the right to grant sublicenses and therefore does also
not have the right to subrogate a third party to its rights and
obligations. Above all neither does it have the right to bring the licenses
into a corporation nor give third parties information either on
manufacturing secrets and experience (know-how) regarding the manufacture
of the object subject to the license or its areas of utilization which they
had not thought about when concluding the agreement and subsequently appear
feasible and/or which they would like to realize without the consent of the
licensor.
6. The Federal Republic of Germany ("Germany") is the territory on which
Hummel may engage in manufacture and sales. Hummel is not allowed to sell
to all classes of customers. Deotexis must give its expressed consent to
every customer in test marketing. Hummel shall undertake considerable
efforts for the launching, maintaining and using the licensed products,
including but not limited to advertising, direct dispatches of advertising
circulars/leaflets, special occasions, trade fairs and advertising
campaigns.
7. The license is not exclusive.
8. Deotexis shall retain the right to manufacture and sell licensed products
in Germany. Deotexis shall have the right to have products other than the
licensed products manufactured and sold in Germany.
9. Deotexis will not provide any tools, equipment, components or other
equipment needed in the manufacturing process of the licensed products.
10. Either party shall have the right to have the license entered into the
Patent Register at the Patent Office to register the license with the
Patent Office. The licensor grants the licensee all authorizations and
signatures required to do so. The costs shall be paid by the party applying
for registration.
11. The licensor shall not be held liable in any way for the risk of industrial
manufacture. Industrial manufacturing shall be carried out exclusively at
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the expense of the licensee. The licensee declares that he knows the object
the license is based on and obligates himself to manufacture it
industrially.
12. The licensor shall have the right to monitor as to whether the objects
manufactured on the basis of the license are of the quality agreed on. He
may prohibit the delivery of low quality products.
13. The licensee obligates himself to report all changes and improvements made
to the objects subject to the license within the duration of the Agreement
on hand to the licensee and make them available to him, and no rise in the
licensing fee shall occur for this.
14. The licensee obligates himself to provide the licensee with any technical
help and all advice necessary to the best of his belief and knowledge and
without reservation.
15. In the event that Deotexis will visit the premises of Hummel in order to
support Hummel (i.e. visits of technicians) these visits shall not comprise
more than five days per month and Hummel will reimburse all costs and
expenses arising from these visits.
16. Hummel will indemnify and hold Deotexis harmless against all claims made by
a third party based on faults or defects of the products manufactured by
Hummel. Deotexis will not give any warranty to the final customer for
products manufacture by Hummel.
17. Hummel may use the Deotexis trademark only in connection with the license.
18. Hummel shall promptly notify Deotexis in writing of any possible breach of
the Deotexis patent rights and at the same time provide any possibly
available evidence for such breach. Deotexis shall be responsible for
taking legal action in such cases of breach of patent rights. If Deotexis
does not file a suit within a period of two months, Hummel shall have the
right to retain 50% of the licensing fees to be paid to Deotexis and use
them for implementing resp. defending the patent rights by way of lawsuit.
19. Hummel shall not have any rights with regard to other Deotexis products
that are manufactured and
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sold in Germany. Deotexis will include Hummel in possible requests for bids
with regard to the licensing of new products in Germany.
20. The licensee shall be obligated to exercise the licensing right. He shall
be obligated not to manufacture or sell any competing products.
21. Deotexis shall be entitled to any improvements of the licensed products
developed by Hummel free of charge.
22. The licensor shall not be liable for the commercial utilizability of the
inventions. The risk of commercial utilizability shall exclusively lie with
the licensee.
23. Before execution of this licensing agreement the licensee will pay to the
account of
The Chase Manhattan Bank
600 Fifth Avenue, 5th Floor
New York, NY 10020
DEOTEXIS INC.
Account No. 134662083
Attention: Eugene Ward
a one-time fee in the amount of DM 10,000. The Agreement will be signed and
delivered by Deotexis upon receipt of the mentioned amount at the Chase
Manhattan Bank. The licensee shall have no right to claim for return of
this amount even in the event that the Agreement may be untimely terminated
for any reason. The licensee herewith settles any licensing fees that may
have incurred from the right to use based on prior use with regard to the
test marketing.
24. Regardless of the actual sales realized by the licensee the total amount of
licensing fees shall not be less than DM 20,000.
25. If the duration of the Agreement during a calendar year did not amount to
12 months the minimum license shall be reduced accordingly.
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26. For the amount of the minimum license not covered by current licensing fees
the claim shall incur at the end of each calendar year.
27. A current licensing fee in the amount of 8% of the net profits gained from
the licensed products [shall be applied]; this licensing fee will be
calculated every quarter for any period of 12 months and shall be paid
within 15 days at the end of the quarter. If the above-mentioned annual net
profits exceed DM 5 million the current licensing fee shall be reduced to
7%; if the annual net profits exceed DM 10 million the current licensing
fee shall be reduced to 6%; for annual net profits amounting to DM 20
million and all profits exceeding this amount a current licensing fee in
the amount of 5% shall be applied.
28. The "net profits" shall be the entire amount that is not in Hummel's
possession or under Hummel's control charged to customers for all services
performed by Hummel and for all sold products ("Invoices") less (A) trade
discounts granted only by Hummel but only to the extent this amount was
shown in the invoices; (B) sales taxes, excise duties, charges for taking
part in the German recycling program "Gruner Punkt" and use taxes to those
services or products paid by Hummel and added to the price Hummel charges
the customers for these services and products); (C) reimbursements by
clients and (D) reimbursements by clients for travelling expenses of
Hummel's employees while working for a customer order, however only to the
extent the customer is actually invoiced for these amounts.
29. All payments of licensing fees shall be made by crediting the amount in DM
to the account of Deotexis Inc. in New York, NY U.S.A. Deotexis shall bear
the risk incurring from the exchange rate when exchanging licensing fees
paid in DM into US Dollars for accounting purposes.
30. Hummel shall be obligated to keep detailed records and books in order to
render it possible for Deotexis to verify the payments made. Deotexis shall
appoint an independent accountant who shall have access to all books and
the right to examine them and report about them.
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31. On the due date of every licensing fee payment Hummel shall provide a
complete statement of account showing total sales, a calculation of the
licensing fees to be paid thereof, consumption, the quantities produced and
the sales prices. Hummel shall be obligated promptly to notify Deotexis
about all difficulties or other more serious problems that may occur in
connection with its entire business.
32. The term of this license shall be one year [from the date of signing] and
shall be automatically renewed, unless one of the parties gives written
notice of termination of the Agreement at least 90 days before year end or
it is prematurely terminated on the grounds of a breach of the Licensing
Agreement or Deotexis grants an exclusive license to a major customer of
their choice.
33. The licensee shall have the right prematurely to terminate the Agreement if
the invention on which the patent is based technologically or economically
no longer finds a market as a result of a change in the situation. The
licensee must provide proof of this.
34. The licensor shall not be obligated to maintain the patents that form the
basis of this Licensing Agreement. If s/he intends to give up a patent,
s/he must notify the licensee thereof at least 6 months before measures
required for maintaining the patent must be taken. Subsequently, the
licensee shall have the possibility to acquire the patent free of charge.
In this event the Licensing Agreement will terminate with the acquisition
[of the patent]. If only part of the patents on which this Agreement is
based will not be maintained, the Licensing Agreement shall be terminated
only insofar as the abovementioned measures must be taken
35. In the case of this non-exclusive license the licensor shall freely decide
as to whether s/he will take measures against an infringement of the patent
or not. Even if applicable law permits the licensee to go to court, s/he
may only do so upon approval of the licensor. In the event that the
licensor takes action against the party that infringed upon the patent the
licensee will provide support to the best
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<PAGE>
of his/her abilities.
The party that decides to prosecute shall bear all possible expenses, shall
do so at its own expense, and, on the other hand, shall be entitled to the
entire incoming amounts. If the parties should agree to prosecute jointly,
the expense and recovery resulting therefrom shall be divided equally
between the parties.
36. The licensee obligates him/herself not to attack the patent on which the
current Agreement is based on, either by way of an action for nullity or by
way of an action for dependency, or directly or through a middle man,
unless nullity is caused by the licensor's notification.
37. The licensee shall not be allowed to pass on any of the licensor's trade
and manufacturing secrets to third parties even after termination of the
Agreement. The licensee shall not have the right to make any use of them
after termination of the Agreement and shall promptly return all documents
concerning the manufacturing process of the object subject to licensing to
the licensor.
38. The Agreement shall be construed and interpreted according to the law of
Germany. The competent courts shall be called upon for any disputes
resulting from or in connection with this Agreement. If in individual cases
the parties agree on it, they may also call upon an arbitration court.
39. Hummel shall be obligated to treat all information regarding the existence
and the regulations of this Agreement confidentially.
Deotexis Inc.
Gerold Tebbe
President, Vice Chairman, Director Date/Place
KuW Hummel Vertriebs GmbH
Werner Hummel
Director Date/Place
[ORIGINAL DOCUMENT IN GERMAN IS SIGNED]
8
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DEOTEXIS
INC. FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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