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 JUNE 30, 2000
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 Incorporation or (I.R.S. Employer
Organization) Identification No.)
855 Third Avenue, Suite 2900
New York, New York 10022-4082
---------------------------------------- -------------------------
(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 August 14, 2000, there are 4,546,875 shares of the registrant's
Common Stock, par value $.001, outstanding.
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 these forward-looking
statements. These statements may include, but not be limited to, projections of
revenues, income or loss, capital expenditures, plans for growth and future
operations, financing needs, sources or potential sources of 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 the
forward-looking statements contained herein.
DEOTEXIS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION........................................1
ITEM 1. FINANCIAL STATEMENTS.........................................1
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
i
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
See the Index to Financial Statements, and the Financial
Statements and Notes thereto appearing at the end of this Quarterly Report.
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,
results of operations and plan of operations should be read in conjunction with
the Financial Statements and Notes thereto appearing at the end of this
Quarterly Report.
RESULTS OF OPERATIONS
Deotexis, Inc., and its subsidiary (the "COMPANY") has not
generated any revenue from operations and is in the development stage. At June
30, 2000, the Company had current assets of $1,125,860, and current liabilities
of $82,997.
PLAN OF OPERATIONS
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, until September 1997, its existence had 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 and 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 reservation of a 1% royalty
by Mr. Tebbe on all net income recognized by the Company from the commercial
exploitation of such rights.
The Company is engaged in the business of developing and
commercializing certain patented controlled-release delivery systems for
consumer products in certain sectors of the toiletries, cosmetics, apparel,
household products, personal care products, medical, paper, industrial or
technical textiles, pharmaceutical, and other markets. The Company's goal is to
expand and build on its patented "know-how," and to acquire access to
manufacturing and marketing resources to become a profitable developer and
supplier of controlled-release delivery systems to a wide range of industry
sectors. Ultimately, the Company plans to become a business owning or holding
the rights to a wide range of products in the area of controlled-release
technology.
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. Following the patent ruling in his favor,
Mr. Tebbe has commenced taking steps to capitalize on his patented processes and
technology.
Over the course of the next three (3) years, the Company
anticipates that it will (a) enter into licensing agreements providing for the
use by licensees of the Company's patents and manufacturing technology in
exchange for a sales-based royalty payment to the Company, (b) initiate joint
ventures and strategic alliances with business partners the Company feels can
utilize or promote the Company's products and technology, (c) enter into one or
more distribution
2
agreements with one or more major drug and pharmaceutical wholesale
distributors, (d) 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, (e) 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, and (f) commence an image
building advertising and public relations campaign in the pharmaceutical and
personal care products industries. There can be no assurance that any or all of
these goals will be achieved by the Company.
PRODUCTS
The Company's core patent covers rate-controlled delivery
systems for chemicals which are microencapsulated and coated onto flexible
textiles. In these systems, the active substances or compounds, including
anti-bacterial compounds, perfumes and emollients, are enclosed in
micro-capsules and coated onto textiles. Depending on the thickness of their
walls and the material used to make them, the tiny capsules can be engineered to
rupture and release their contents at pre-programmed intervals, or in response
to changes in specific conditions (such as heat, humidity, pressure, etc.),
enabling the user to benefit from timely, correctly-dosed applications of
personal care, pharmaceutical or other compounds. Textile-based
"controlled-release delivery systems" have recently come into widespread use in
certain female hygiene products (sanitary pads) and in baby's diapers, where the
use of microencapsulated anti-bacterial compounds has permitted the
manufacturers to reduce the volume and thickness of the material and, most
importantly, increase the flexibility and therefore the comfort and convenience
of these products without reducing their effectiveness.
Based on its textile-based controlled-release delivery system,
the Company has developed and patented a number of consumer products, including
the "Cold Scarf," a disposable scarf impregnated with herbal substances for use
by people seeking relief from the symptoms of colds and congestion. In addition,
the Company has developed and patented controlled-release systems which can be
integrated with adhesive plasters, latex gloves and other "carriers" to deliver
micro-encapsulated substances in new ways. The Company's business plan envisions
business ventures with other companies which have know-how in mature basic
technologies such as adhesive plaster manufacturing and paper products, and are
seeking new ideas for innovative products that the Company's delivery system
technology may help to provide.
TARGET MARKETS; MANUFACTURING AND DISTRIBUTION STRATEGY
Potential end-users of the Company's systems are consumers
worldwide. In order to reach these end-users, the Company intends to license its
systems to corporations which manufacture, sell and distribute consumer products
to the personal care, pharmaceutical, medical, paper, industrial or technical
textile and household products markets. The ability to use the Company's
technology by virtue of a license, in the Company's opinion, should offer the
licensee a unique opportunity to diversify and expand its sales.
RETENTION OF SENIOR MANAGEMENT
The Company's seven member Board of Directors has extensive
experience in a wide array of business sectors. Mr. Gerold Tebbe serves as the
President, Chief Executive Officer and a Director of the Company, with overall
responsibility for operations. Mr. Tebbe
3
also serves as the Company's Secretary and Treasurer and will do so until such
time as the Board of Directors determines that it is appropriate to hire
suitable personnel to serve in those positions. In addition, Mr. Tebbe has been
appointed Acting Chief Financial Officer, to execute the duties of Chief
Financial Officer until such time as the Board of Directors determines that the
Company's level of operations warrants the retention of a full-time permanent
Chief Financial Officer.
COMPANY STRUCTURE AND SUBSIDIARIES
The Company formed a wholly-owned subsidiary in Germany in
March 1999, Hecking Deotexis GmbH (formerly D-Tex Technologie Holding GmbH)
("Deotexis Germany"), to establish a local presence and serve as a holding
company for the Company's investment in Medisana GmbH ("Medisana"), a marketer
and distributor of medical devices and wellness supplies located in Meckenheim,
Germany, and any other joint venture or equity interests which may materialize
through cooperation agreements with additional licensees. Deotexis Germany will
initially have an independent professional manager who will serve as interim CEO
of that subsidiary on a part-time basis while licenses are negotiated and joint
ventures formed. Once the Company's operations have progressed to the joint
venture stage, the Company expects to engage full-time management to monitor its
German relationships and investments, and to identify and negotiate new business
opportunities. Assuming that this approach is successful, the Company intends to
set up additional "technology holding companies" in other countries (including
the United States) and to follow the same strategy. As the volume of activity
increases, to support Mr. Tebbe, the Company expects to appoint a seasoned
financial executive at the parent company level, who will be responsible for
accounting, consolidations, finance, cash management, regulatory and securities
law compliance, and other parent company functions.
On June 13, 2000, Medisana consummated an initial public
offering ("IPO") of its securities on the SMAX exchange in Germany. During June
2000, the Company sold 10,000 shares of Medisana's stock for approximately
$140,000 and recognized a gain on the sale in the amount of $95,432. The Company
is restricted from selling any of its remaining shares for one year from the
date the IPO was consummated and is allowed to sell only a limited amount of
such shares for an additional 24 months thereafter. At June 30, 2000, the
Company owned approximately 171,000 shares of restricted stock in Medisana. At
such date, the market price for unrestricted shares of Medisana stock was
approximately 13.50 Euros per share (equivalent to U.S. $12.85 per share) and
the aggregate market value for a similar number of unrestricted shares was in
excess of the Company's cost of such shares.
As described below, the Company has an option to acquire the
assets of NTW (subject to certain contingencies, including the securing of
suitable financing), and thereafter use products based on the Company's
technology to diversify and expand NTW's existing product offerings and revenue
base. In addition, the Company hopes that, if it is able to consummate an
acquisition, officers and employees of NTW will be able to assist in licensing
activities and new product development, thereby increasing the Company's
management depth and strengthening its product management and marketing skills.
If the Company does not consummate the acquisition, the
Company will reassess its goals and consider other possibilities for the
direction of the Company.
4
AGREEMENTS WITH NTW
In January of 2000, Deotexis Germany entered into agreements
that, in essence, give Deotexis Germany an option, until May 31, 2000, to
acquire the assets of Neuenkirchener Textilwerke Hecking GmbH & Co. KG ("NTW"),
for approximately DM 27.5 million (US$ 13.415 million). NTW is a
long-established weaving and textile finishing business based near Munster,
Germany. It was forced into bankruptcy proceedings in 1999 when its parent
company became insolvent. NTW possesses coating and finishing machinery that is
well-suited to performing microencapsulation procedures on a wide range of
fabrics.
Deotexis Germany is in nominal control of the assets and
operations of NTW, and is forwarding orders to NTW for fulfillment. This
arrangement was reached in an attempt to assure NTW's creditors and suppliers
that NTW would remain a going concern. Deotexis Germany receives no compensation
for administering NTW's operations, and is indemnified for all liabilities and
costs that could potentially be associated therewith.
Though the purchase was to be completed by May 31, 2000, as of
August 7, 2000, the Company is still in the process of negotiating the
completion of the purchase and is continuing due diligence with respect to NTW,
including studying its operations and prospects. In addition, the Company is
evaluating financing alternatives that would enable it to complete the
acquisition. Pursuant to the documentation that is already in place, the Company
is permitted to abandon the acquisition (a) if NTW's results of operations for
the first half of 2000 are below the results for the second half of 1999, (b) if
it is unable to arrange satisfactory financing, (c) upon unsatisfactory due
diligence results, or (d) failure to negotiate final agreements.
Assuming a satisfactory resolution of all of the foregoing,
the Company feels that NTW's coating and finishing operations would provide it
with significant microencapsulation capacity to enable the Company to capitalize
on existing and potential business opportunities, and to quickly grow the
Company's revenues.
LICENSING
To avoid the typically large costs of advertising and
promoting new consumer products (currently estimated at $15-20 million for a
single new product in Germany alone), the Company plans to initially follow a
licensing strategy to market and distribute its delivery systems.
The Company anticipates that a large portion of its potential
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 extendable, multi-year licenses to corporations in the apparel, cosmetics,
toiletries, household products, personal care products, medical, paper,
industrial or technical textile and pharmaceutical 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 products employing the Company's
delivery systems.
5
With respect to any products which it is required to
manufacture that are not manufactured for a specific customer, the Company
anticipates that it will enter into agreements with wholesale distributors to
distribute such products through those companies' distribution networks,
specifically to retailers that purchase their products from 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 with the types of companies described above 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 and systems 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
The Company has begun a public relations campaign to establish
the presence and build the image of the Company, initially in Germany, with the
intention to eventually expand this activity to all its primary target markets
in Europe and the United States. The public relations campaign has been designed
to present the Company as a technology-driven developer and supplier of quality,
innovative, economical controlled-release products. This campaign currently
utilizes the services of an independent public relations firm selected by the
Company.
The Company's anticipated advertising campaign, which is
scheduled to commence after the first licenses have been signed and the Company
has set up its distribution channels to service the consumer market, 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.
On an ongoing basis, the Company is also considering ways to
enhance communications with its shareholders and ensure that information on
important Company developments and opportunities continues to reach them on a
timely basis.
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 textile-based controlled-release delivery systems. It
is the Company's intention to commercially exploit the patents for its
controlled-release delivery systems technology through the introduction and
licensing of the Company's systems, initially in 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 income recognized by the Company in connection with
the commercial exploitation of these patents and patent rights. There are no
assurances that the Company will ever achieve net income as a result of the
commercial exploitation of these intellectual property rights. Furthermore, if
the occasion arises, the Company will have to
6
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, negotiations
relating to potential strategic alliances and potential joint ventures,
acquisitions, 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 Company's products and develop its delivery systems. On June 30,
2000, the Company and its subsidiary had $887,330 of liquid assets, working
capital of $1,042,863 and shareholders' equity of $936,304. The Company has not
manufactured or licensed any of its delivery systems since inception, except
that the Company's investment in Medisana GmbH contemplates the grant of a
license to Medisana by the Company to enable Medisana to study the integration
of the Company's technology into its existing products, and to explore the
development of new products utilizing the Company's technology. The terms of the
Medisana license, and the compensation the Company is to receive with respect
thereto, have not yet been finalized.
During the period ended June 30, 2000, Mr. Tebbe, the
President, Chief Executive Officer, Secretary, Treasurer and Acting Chief
Financial Officer, and a Director of the Company, loaned 450,000 Euro
(approximately $465,000) to the Company. The Company invested these funds in
Hecking Deotexis GmbH, its German subsidiary.
CAPITAL RESOURCES
Following commencement of its operations, the Company's cash
requirements will be significant. While the Company currently has cash on hand
sufficient to finance its proposed business during the next twelve (12) months
of its operations, excluding the costs of any potential acquisitions, the
Company is dependent on internally generated cash flow and upon securing a
working capital line of credit to implement its business plan thereafter. There
can be no assurance that the Company will be able to maintain its business and
operations without additional financing after the next twelve (12) months of
operations or that, thereafter, it will be able to generate sufficient cash flow
and/or secure sufficient borrowings to meet the Company's working capital
requirements.
7
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
27. Financial Data Schedule.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the period
covered by this Quarterly Report on Form 10-Q.
8
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, Acting
Chief Financial Officer, Secretary and
Treasurer
Dated: August 14, 2000
9
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Balance Sheets at December 31, 1999
and June 30, 2000 (unaudited) F-2
Condensed Consolidated Statements of Operations for the six
months ended June 30, 1999 and 2000 (unaudited) and
cumulative since March 6, 1992 (inception) to June 30, 2000
(unaudited) F-3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1999 and 2000 (Unaudited) F-4
Consolidated Statement of Stockholders' Equity for the
period March 6, 1992 (inception) to December 31, 1995, and
for the years ended December 31, 1996, 1997, 1998 and 1999
and for the six months ended June 30, 2000 (unaudited) F 5-6
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 2000 (unaudited) and
cumulative since March 6, 1992 (inception) to June 30, 2000
(unaudited) F 7-8
Notes to Condensed Consolidated Financial Statements F-9
F-1
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 936,339 $ 887,330
Restricted cash 151,354
Prepaid taxes 7,016 5,016
Prepaid expenses 82,160
----------- -----------
Total current assets 943,355 1,125,860
Investment in a company 810,926 766,178
Deferred financing costs 24,300
=========== ===========
Total assets $ 1,754,281 $ 1,916,338
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 77,167 $ 82,997
----------- -----------
Total current liabilities 77,167 82,997
----------- -----------
Due to officer 291,765 897,037
----------- -----------
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 4,156,685 4,156,685
Deficit accumulated during the development stage (2,775,883) (3,181,365)
Accumulated other comprehensive loss - foreign
currency translation adjustment (43,563)
----------- -----------
Total stockholders' equity 1,385,349 936,304
----------- -----------
Total liabilities and stockholders' equity $ 1,754,281 $ 1,916,338
=========== ===========
SEE ACCOMPANYING NOTES
F-2
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months
Ended June 30, March 6, 1992
-------------- (Date of Inception) to
1999 2000 JUNE 30, 2000
------------ ----------- --------------------
Income:
Interest and other income $50,360 $ 10,936 $ 352,479
Gain on sale of investment 95,432 95,432
---------- --------- -----------
Total income 50,360 106,368 447,911
-------- -------- ----------
Expenses :
Directors fees 70,000 70,000 350,000
Interest on obligation to officer 8,400 28,600 67,200
Consulting 38,125
Rent 2,099 2,333 53,848
Corporation franchise taxes 3,634 2,000 36,063
Filing fees 17,954 19,094 156,095
Amortization 500
Bank charges 2,329
Insurance 69,410 69,410 349,300
Office 25,703 41,331 256,414
Professional fees 370,912 279,082 2,319,402
---------- ---------- ------------
Total expenses 568,112 511,850 3,629,276
---------- ---------- ------------
Net loss $(517,752) $(405,482) $(3,181,365)
========= ========= ===========
Basic loss per share $(.11) $(.09)
===== =====
Weighted average number of
shares outstanding 4,546,875 4,546,875
========== ==========
SEE ACCOMPANYING NOTES
F-3
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months
Ended June 30,
----------------------------
1999 2000
----------- -----------
Income:
Interest $ 21,912 $ 4,438
Gain on sale of investment 95,432
----------- -----------
21,912 99,870
----------- -----------
Expenses:
Directors fees 35,000 35,000
Interest on obligation to officer 2,000 17,100
Rent 1,129 1,168
Corporation franchise taxes 1,600 1,000
Filing fees 1,985 13,148
Insurance 34,705 34,705
Office 14,408 17,945
Professional fees 156,622 107,458
----------- -----------
Total expenses 247,449 227,524
----------- -----------
Net loss $ (225,537) $ (127,654)
=========== ===========
Basic loss per share $ (.05) $ (.03)
=========== ===========
Weighted average number of
shares outstanding 4,546,875 4,546,875
=========== ===========
SEE ACCOMPANYING NOTES
F-4
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Accumulated Total
Comprehensive ----------------- Paid-In Development Comprehensive Stockholders'
Loss Shares Amount Capital Stage Loss Equity
------------- ------ ------ ---------- ----------- ------------- -------------
Issuance of 160,000 common shares on
September 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
($6.25 per share) 100,000 100 624,900 625,000
Deferred offering costs charged to paid-in
capital (31,461) (31,461)
Net loss - December 31, 1994 (27,184) (27,184)
Net loss - December 31, 1995 (35,005) (35,005)
------- ---------- ---------- ----------
Balance - December 31, 1995 279 624,860 (64,017) 561,122
Net loss (43,737) (43,737)
------- ---------- ---------- ----------
Balance - December 31, 1996 279 624,860 (107,754) 517,385
Distributions (475,750) (475,750)
(CONTINUED)
F-5
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Common Stock Additional During the Accumulated Total
Comprehensive ----------------- Paid-In Development Comprehensive Stockholders'
Loss Shares Amount Capital Stage Loss Equity
------------- ------ ------ ---------- ----------- ------------- -------------
Sale of 4,183,125 shares for cash ($.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
Capital contributed by principal stockholder 1,200 1,200
Net loss (1,367,161) (1,367,161)
----------- -------- ----------- ------------ -----------
Balance - December 31, 1998 4,546,875 4,547 4,156,685 (1,714,816) 2,446,416
Net loss (1,061,067) (1,061,067)
----------- -------- ----------- ------------ -----------
Balance - December 31, 1999 4,546,875 4,547 4,156,685 (2,775,883) 1,385,349
Net loss (unaudited) $(405,482) (405,482) (405,482)
Other comprehensive loss:
Foreign currency translation adjustment
(unaudited) (43,563) $(43,563) (43,563)
--------- ----------- --------- ----------- ------------ -------- -----------
Comprehensive loss (unaudited) $(449,045)
=========
Balance - June 30, 2000 (unaudited) 4,546,875 $4,547 $4,156,685 $(3,181,365) $(43,563) $ 936,304
========== ======== ========== ============ ======== ===========
F-6
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months March 6, 1992
Ended June 30, (Inception) through
1999 2000 June 30, 2000
------------- ------------ --------------------
Cash flows from operating activities:
Net loss $ (517,752) $(405,482) $(3,181,365)
Adjustments to reconcile net
loss to net cash used in operating activities:
Amortization 500
Services paid for by principal stockholder 1,200
Gain on sale of investment (95,432) (95,432)
Changes in operating assets and liabilities:
Restricted cash (151,354) (151,354)
Prepaid taxes (5,211) 2,000 (5,016)
Prepaid expenses (69,410) (82,160) (82,160)
Accounts payable and accrued expenses (1,324) 5,830 82,497
Due to officer, net (286,880) 140,177 431,942
------------ ------------ -------------
Cash used in operating activities (880,577) (586,421) (2,999,188)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investment (810,926)
Proceeds from sale of investment 140,180 140,180
------------ -------------
Cash provided by (used in) investing activities 140,180 (670,746)
------------ -------------
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)
Borrowings from officer 465,095 465,095
Payment of deferred financing costs (24,300) (24,300)
------------- -------------
Cash provided by financing activities 440,795 4,600,827
------------- -----------
Effect of foreign exchange rate changes on cash (43,563) (43,563)
------------ ------------ -------------
Net (decrease) increase in cash
and cash equivalents (880,577) (49,009) 887,330
Cash and cash equivalents -
beginning of year/period 2,956,090 936,339
----------- ----------- ---------------
Cash and cash equivalents -
end of period $2,075,513 $ 887,330 $887,330
========== ========== ========
(CONTINUED)
F-7
Six Months March 6, 1992
Ended June 30, (Inception) through
1999 2000 June 30, 2000
------------- ------------ --------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $22,000 $22,000
======= =======
Income taxes $8,995 $41,079
====== =======
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
=======
The principal stockholder of the
Company transferred 2,500 shares
of common stock owned by him to
two consultants for services
rendered to the Company. The
Company recorded the fair market
value of those securities at $.48 per
share $1,200
=======
F-8
SEE ACCOMPANYING NOTES
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED 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 Company organized a wholly-owned subsidiary, Hecking Deotexis GmbH
(formerly, D-Tex Technologie Holding GmbH), under the laws of Germany, in
March 1999.
Basis of Presentation:
The condensed consolidated 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 consolidated financial statements should be
read in conjunction with the condensed notes thereto. In the opinion of
management of the Company, the accompanying unaudited condensed
consolidated 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.
F-9
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiary. All material intercompany accounts and transactions
have been eliminated.
Foreign Currency Translation:
Assets and liabilities of the foreign subsidiary are translated into U.S.
dollars at period-end exchange rates, and statement of operations items
are translated at average exchange rates for the period. Translation
gains or losses are recorded in stockholders' equity and transaction
gains and loses are reflected in operations.
Cash and Cash Equivalents:
Cash and cash 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 of three months or less
when purchased to be cash equivalents.
Concentration of Credit Risk:
At June 30, 2000, the Company maintained its cash in certain financial
institutions. Certain institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000.
Investment in a Company:
The investment in a company referred to in Note 5 is recorded at cost.
F-10
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 patents
acquired are not being amortized as the consideration was nominal. These
patents are for the textile-based controlled-release delivery systems for
consumer products in certain sectors of the toiletries, cosmetics,
apparel, household products and personal care products markets, and
applicators in the pharmaceutical industry.
Earnings (loss) per common 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.
Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period, adjusted to reflect potentially
dilutive securities. Due to the loss from operations, options granted to
the Board of Directors were not included in the computation of diluted
earnings per share because the result of the exercise of such securities
would be to reduce the loss per share.
3. COMPREHENSIVE INCOME:
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which requires the components of comprehensive income to be disclosed in
the financial statements. Comprehensive income consists of net income
(loss) and foreign currency translation adjustments, and is presented in
the consolidated statement of stockholders' equity.
F-11
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. RESTRICTED CASH:
Knorr Capital Partner AG, a former consultant and advisor to the Company,
has made a claim against the Company for DM 307,869.55 in connection with
a Consulting Agreement between the parties, which has since been
terminated. Knorr claims it is owed this amount for consulting services,
and a contingency fee for brokering the Company's investment in Medisana.
(See Note 5 below). The Company maintains that Knorr is owed only a
fraction of the contingency fee it is claiming, and is owed nothing under
the Consulting Agreement because it ultimately provided no services to
the Company with respect thereto. The Company therefore believes it has
counterclaims against Knorr in excess of the amounts Knorr has claimed
from the Company. To attempt to resolve the dispute, the Company has paid
into escrow, with Knorr's attorneys, the sum of DM 307,869.55
(approximately $151,000 at June 30, 2000). The Company strongly feels
Knorr's claims are without merit, and that the dispute will be resolved
in the Company's favor without material cost to the Company.
5. INVESTMENT IN A COMPANY:
On October 28, 1999, the Company purchased a 7.4% interest in Medisana,
Medizinalbedarfsgesellschaft mit beschrankter Haftung ("Medisana").
Medisana is a German corporation, which develops, manufactures and sells
home health care products. In addition, the Company has agreed to grant
to Medisana a license to use and exploit the Company's controlled-release
delivery system. Since the terms of this license have yet to be
negotiated, no cost has been ascribed to such obligation.
On June 13, 2000, Medisana filed its initial public offering ("IPO") on
the SMAX exchange in Germany. During June 2000, the Company sold 10,000
Medisana shares for approximately $140,000 and recognized a gain on the
sale in the amount of $95,432. The Company is restricted from selling any
of its remaining shares for one year from the IPO date and will be
limited in its selling of such shares for an additional 24 months. At
June 30, 2000, the Company owned approximately 171,000 shares of
restricted Medisana shares. At such date, the market price for
unrestricted shares of Medisana was approximately 13.50 Euros per share
(equivalent to U.S. $12.85 per share) and the aggregate market value for
a similar number of unrestricted shares was in excess of the Company's
cost of such shares.
F-12
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to Medisana's IPO, there was no readily determinable fair value for
its securities, and the current existence of the restriction on the
shares held by the Company, resulted in the Company's investment not
being subject to the accounting guidelines set forth in Statement of
Financial Accounting Standards No. 115 ("Accounting for Certain
Investments in Debt and Equity Securities"). Upon the expiration (or
reduction to one year) of the restricted period, the investment will be
classified as an available-for-sale security and, accordingly, will be
carried at fair value.
6. DEFERRED COSTS:
The Company paid DM50,000 (US $24,300) to Nordrhein-Westfalen, a State
government in Germany, to obtain a guarantee (DM16 Million) to be
presented to a bank as a condition for its financing the purchase of NTW
(See Note 9).
7. DUE TO OFFICER:
Due to officer consists of approximately $292,000 and $897,000 at
December 31, 1999 and June 30, 2000, respectively, bears interest at 8%
per annum and is due July 1, 2001 or earlier if other sources of
financing are obtained. Included in the advances by the officer to the
Company during the six months ended June 30, 2000 was approximately
$465,000 which was invested in the subsidiary. Included in due to officer
at December 31, 1999 and June 30, 2000 is approximately $16,600 and
$45,200, respectively, relating to interest expense accrued on the debt.
8. RELATED PARTY TRANSACTIONS:
The Company engages the services of a professional consulting firm; a
director of the Company is a partner in the consulting firm. During the
six months ended June 30, 1999 and 2000, the Company incurred expenses of
approximately $108,000 and $71,000. As of June 30, 1999 and 2000,
approximately $14,500 and $-0- was owed to this related party.
F-13
DEOTEXIS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. OTHER MATTERS:
During January 2000, the Company entered into a letter of intent to
purchase the principal operating assets of Neuenkirchener Textilwerke
Hecking GmbH & Co. KG ("NTW") for approximately DM27.5 million (US $13.4
million). The operating assets include, among other assets, all land and
buildings, other fixed assets, inventory, customer lists, and sales
agreements of NTW. The Company is permitted to abandon the acquisition
(a) if NTW's results of operations for the first half of 2000 are below
the results for the second half of 1999, (b) if it is unable to arrange
satisfactory financing, (c) upon unsatisfactory due diligence results, or
(d) failure to negotiate a final agreement.
Furthermore, the Company entered into an agreement with NTW. The Company
is in nominal control of the assets and operations of NTW until the asset
purchase is finalized. Under the terms of the agreement, the purchase was
to be completed by May 31, 2000. As of August 7, 2000, the Company is
still in the process of negotiating the completion of the purchase.
F-14