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, 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 August 10, 1998, there were 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 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.
DEOTEXIS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Page
----
PART I
FINANCIAL INFORMATION.................................................. 1
ITEM 1. FINANCIAL STATEMENTS.............................................................................. 1
Index to Financial Statements.......................................................... F-1
Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997.................................................................. F-2
Statements of Operations for the six months ended
June 30, 1998 and 1997 (unaudited) and cumulative
since March 6, 1992 (inception) to June 30, 1998
(unaudited)............................................................................ F-3
Statements of Operations for the three months ended
June 30, 1998 and 1997 (unaudited)..................................................... F-4
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 six months ended June 30, 1998 (unaudited)................................. F-5
Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited) and cumulative since
March 6, 1992 (inception) to June 30, 1998 (unaudited)................................. F-6
Notes to Financial Statements.......................................................... F-8
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................................................................................. 2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................. 7
SIGNATURES................................................................................................................... 8
i
DEOTEXIS, INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page
----
Balance Sheets at December 31, 1997 and June 30, 1998 (unaudited) F-2
Statements of Operations for the six months ended June 30, 1997 and 1998
(unaudited) and cumulative since March 6, 1992 (inception)
to June 30, 1998 (unaudited) F-3
Statements of Operations for the three months ended June 30, 1997
and 1998 (unaudited) F-4
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 six
months ended June 30, 1998 (unaudited) F-5
Statements of Cash Flows for the six months ended June 30, 1997 and 1998
(unaudited) and cumulative since March 6, 1992
(inception) to June 30, 1998 (unaudited) F-6
Notes to Financial Statements F-8
F-1
DEOTEXIS, INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31, 1997 June 30, 1998
----------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $4,034,700 $1,455,359
Treasury bills 1,911,754
Prepaid taxes 1,561 1,561
Prepaid insurance 70,534
---------------- ------------
Total assets (all current) $4,036,261 $3,439,208
---------------- ------------
---------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 73,097 $ 93,685
Due to officer 150,787 237,179
---------------- ------------
Total current liabilities 223,884 330,864
---------------- ------------
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 4,156,685
Deficit accumulated during the development
stage (347,655) (1,052,888)
---------------- ------------
Total stockholders' equity 3,812,377 3,108,344
---------------- ------------
Total liabilities and stockholders'
equity $4,036,261 $ 3,439,208
---------------- ------------
---------------- ------------
See accompanying notes
F-2
DEOTEXIS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
Six Months March 6, 1992
Ended June 30, (Date of Inception) to
1997 1998 June 30, 1998
----------- ----------- -----------
Interest and other income $ 12,931 $ 84,293 $ 175,691
----------- ----------- -----------
Expenses:
Directors fees 70,000 70,000
Consulting 7,500 38,125
Rent 7,500 38,125
Corporation franchise taxes 495 9,200 16,736
Filing fees 2,217 73,408 94,691
Amortization 17 500
Bank charges 230 2,310
Insurance 70,536 70,536
Office 12 24,163 42,315
Professional fees 1,700 542,219 855,241
----------- ----------- -----------
Total expenses 19,671 789,526 1,228,579
----------- ----------- -----------
Net loss $ (6,740) $ (705,233) $(1,052,888)
----------- ----------- -----------
----------- ----------- -----------
Basic loss per share $ (.02) $ (.15)
----------- -----------
----------- -----------
Weighted average number of
shares outstanding 278,750 4,546,875
----------- -----------
----------- -----------
See accompanying notes
F-3
DEOTEXIS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended June 30,
-------------------------------
1997 1998
----------- -----------
Interest and other income $ 6,743 $ 62,322
----------- -----------
Expenses:
Directors fees 70,000
Consulting 3,750
Rent 3,750
Corporation franchise taxes 64
Filing fees 1,439 3,107
Bank charges 155
Insurance 35,268
Office 12 13,553
Professional fees 650 229,468
----------- -----------
Total expenses 9,820 351,396
----------- -----------
Net loss $ (3,077) $ (289,074)
----------- -----------
----------- -----------
Basic loss per share $ (.01) $ (.06)
----------- -----------
----------- -----------
Weighted average number of
shares outstanding 278,750 4,546,875
----------- -----------
----------- -----------
See accompanying notes
F-4
DEOTEXIS, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Common Additional During the Total
Stock Paid-In Development Stockholders'
-------------------
Shares Amount Capital Stage Equity
---------- --------- ------------ ------------ ------------
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
Capital contributed by
principal stockholder (unaudited) 1,200 1,200
Net loss (unaudited) (705,233) (705,233)
---------- --------- ------------ ------------ ------------
Balance - June 30, 1998 (unaudited) 4,546,875 $4,547 $4,156,685 $(1,052,888) $3,108,344
---------- --------- ------------ ------------ ------------
---------- --------- ------------ ------------ ------------
See accompanying notes
F-5
DEOTEXIS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months March 6, 1992
Ended June 30, (Inception) through
1997 1998 June 30, 1998
------------ -------------- -------------------
Cash flows from operating activities:
Net loss $ (6,740) $ (705,233) $(1,052,888)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Amortization 17 500
Services paid for by principal stockholder 1,200 1,200
Changes in operating assets and liabilities:
Prepaid taxes (870) (2,061)
Prepaid insurance (70,534) (70,534)
Accounts payable and accrued
expenses 13,500 20,588 93,685
Due to officer, net 86,392 237,179
----------- ------------ ----------
Cash (used in) provided by operations 5,907 (667,587) (792,919)
Cash flows from investing activities:
Purchase of treasury bills (1,911,754) (1,911,754)
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 increase (decrease) in cash
and cash equivalents 5,907 (2,579,341) 1,455,359
Cash and cash equivalents -
beginning of year/period 530,337 4,034,700 -
----------- ------------ ----------
Cash and cash equivalents -
end of period $536,244 $1,455,359 $1,455,359
----------- ------------ ----------
----------- ------------ ----------
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
----------
----------
(Continued)
F-6
DEOTEXIS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
(Concluded)
Six Months March 6, 1992
Ended June 30, (Inception) through
1997 1998 June 30, 1998
------------ -------------- -------------------
The principal stockholder of the Company
transferred 2,500 shares of common stock
owned by him to two consultants for
services rendered. The Company recorded
the fair market value of those securities at
$.48 per share $1,200 $1,200
-------------- -------------------
-------------- -------------------
See accompanying notes
F-7
DEOTEXIS, INC.
(A Development Stage Company)
CONDENSED NOTES TO 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 income 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-8
DEOTEXIS, INC.
(A Development Stage Company)
CONDENSED NOTES TO 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. The
Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
At June 30, 1998, Treasury Bills included on the balance sheet are for
terms in excess of three months.
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-9
DEOTEXIS, INC.
(A Development Stage Company)
CONDENSED NOTES TO 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 the
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-10
DEOTEXIS, INC.
(A Development Stage Company)
CONDENSED NOTES TO 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 to OHL in
exchange for a cash payment of $4 million and the transfer to the
Company for nominal consideration, plus future royalties tied to the
income 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.
On April 16, 1998, the principal stockholder of the Company transferred
2,500 shares of his common stock to two companies for professional
services rendered in connection with the Company being listed on the
Bermuda Stock Exchange. This was recorded as an increase in additional
paid-in capital and professional services. The Company recorded the
estimated fair market value of those securities at $.48 per share.
4. STOCK OPTION PLAN:
Effective May 20, 1998, the Company adopted the 1998 Director Stock
Option Plan ("the Plan"). All non employee Directors are eligible to
participate in the Plan. The Plan shall terminate on May 19, 2008. The
Company has reserved 200,000 shares of common stock for issuance of
shares under the Plan. Under the Plan, eligible Directors shall be
granted, on May 20, 1999 and each year thereafter, an option to
purchase $20,000 worth of common stock. Each option granted shall be
fully vested on the date of grant and shall be immediately
exercisable. The price per share shall be the fair market value on
the date of grant. The life of the option is ten years from grant
date; or three years following retirement, non-reelection or death
or disability; or six months following resignation. No options have
been granted under the Plan.
F-11
DEOTEXIS, INC.
(A Development Stage Company)
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. 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 six months ended June 30, 1998, the Company accrued expenses
of approximately $237,179 for services provided to the Company by a
director of the Company.
F-12
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
See pages F-1 to F-12.
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.
Pursuant to proper notice duly given to each stockholder, the
Company held its 1998 Annual Meeting of Stockholders on July 17, 1998. The
following items were included in the notice as on the meeting's agenda for
stockholder action:
1. Election of the Company's Board of Directors. The seven
nominees for the seven-member Board were: David F. Bolger, Aubrey L. Cole, Tony
Kirk, Michael J. Rosenberg, Gerold Tebbe, Ira T. Wender and Robert F. Wright.
2. Ratification and approval of the 1998 Director Stock Option
Plan, the provisions of which call for the grant to each director of $20,000
worth of stock options for the Company's Common Stock each year, commencing May
20, 1999.
3. Ratification and approval of M.R. Weiser & Co. LLP
("Weiser") as the Company's independent accountants and auditors for the fiscal
year ending December 31, 1998.
The results of the voting by the stockholders with respect to
the above-described items was as follows:
1. Out of a total of 4,546,875 shares of Common Stock of the
Company issued and outstanding, and available to vote, each nominee for director
received 3,287,917 votes in favor, and no votes against, his nomination to the
Board of Directors of the Company.
1
2. Out of the total of 4,546,875 shares of Common Stock of the
Company issued and outstanding, and available to vote, on the ratification and
approval of the 1998 Director Stock Option Plan, 3,282,515 votes were cast in
favor thereof, no votes were cast against, and there were 5,402 abstentions.
3. Out of the total of 4,546,875 shares of Common Stock of the
Company issued and outstanding, and available to vote, on the ratification and
approval of Weiser as the Company's independent accountants and auditors for the
fiscal year ending December 31, 1998, 3,284,443 votes were cast in favor
thereof, no votes were cast against, and there were 3,474 abstentions.
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 June 30, 1998, the Company
had current assets of $3,439,208, and current liabilities of $330,864.
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 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 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 Company is engaged in the business of developing and
commercializing 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'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) enter into one or
more distribution agreements with one or more major drug and pharmaceutical
wholesale distributors, (c) either
2
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, (d) 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 (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 products the Company is currently developing and plans
to test-market 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 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.
Target Markets; Manufacturing and Distribution Strategy
Potential customers for the Company's products are consumers
worldwide. To reach consumer markets, the Company intends to sell its products
through two separate channels. The primary channel will be distribution through
licensees, which are expected to be large and mid-sized corporations in the
toiletries, cosmetics, apparel, household products and personal care products
industries. To attempt to meet the demand that the Company anticipates will
result from customers unable or unwilling to manufacture the products
themselves, the Company hopes to acquire manufacturing capability to supply the
secondary channel of distribution: the wholesale distributors that supply
drugstores and pharmacies. The Company has had preliminary discussions with
several major companies in both categories, though there can be no assurance
that any contracts or agreements will be consummated. In addition, the Company
has recently executed a formal 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 the near term, in return for payment of licensing
fees and royalties to the Company.
Retention of Senior Management
Seven directors have been elected to the Company's Board of
Directors by the Company's stockholders. 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:
Parent 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 parent
company level for accounting, consolidations, finance, cash management,
regulatory and securities law compliance, and other parent company functions.
Management of to-be Acquired Operating Company. To enable the
Company to supply its Products to potential customers who do not plan to license
the Company's technology to manufacture the Products themselves, it is the
Company's intention, within the next six to twelve (6-12) months, to acquire an
operating company in Europe or the United States. In addition to gaining
manufacturing capability, the Company also anticipates acquiring management
expertise through such an acquisition by employing the management of the
acquired company. If the Company succeeds in closing such an acquisition, it
plans to operate the acquired company as a subsidiary of the Company.
3
Product Managers. As stated above, the Company intends to
acquire an operating company with manufacturing capabilities in Europe or the
United States within the next six to twelve (6-12) months, and thereafter use
the Company's Products to diversify and expand the acquired company's existing
revenue base. To manage sales of the Company's Products, the Company anticipates
hiring Product Managers. In addition, the Company hopes that, if it is able to
consummate an acquisition, as discussed above, officers and other employees of
the acquired company will have expertise in licensing products of the type the
Company plans to sell, and that the Company will be able to exploit this
expertise by placing one or more of these individuals in the position of Product
Manager for the Company's Products. 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.
Licensing
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 a large majority 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 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 with respect to those potential customers who are unable or
unwilling to license the Company's technology to manufacture the Products
themselves, 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 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 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, 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.
4
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 application 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.
If the potential pharmaceutical applications for the Company's
Products 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 receive 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 income 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 income as a result of the commercial exploitation
of these intellectual property rights. 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, negotiation and execution of the Hummel
license, negotiations with other potential licensees and distributors, 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 June 30, 1998, the Company
had $3,439,208 of liquid assets, working capital of $3,108,344 and
shareholders' equity of $3,108,344. The Company has not manufactured or
licensed any of its Products since inception; however, as stated above,
the Company has arranged for 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.
5
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.
6
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule.
(b) 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.
7
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: August 14, 1998
8
EXHIBIT INDEX
-------------
EXHIBIT PAGE NUMBER
- ------- -----------
27. Financial Data Schedule --