U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
................................................................................
SPA FAUCET, INC.
(Name of Small Business Issuer in its Charter)
................................................................................
Utah 13-3919650
----------------------- --------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
................................................................................
8926 Commanche Avenue
Chatsworth, California 91311
(Address of principal executive offices) (Zip Code)
(801) 486-4131
(Issuer's telephone number)
................................................................................
<TABLE>
<CAPTION>
<S> <C>
Securities to be registered under Section 12(b) of the Act:
Title of each class to be so registered Name of each exchange on which each class is to be registered
None
..................................................................................................................................
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
..................................................................................................................................
(Title of class)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PART I .........................................................................................................1
Item 1. Description of Business..........................................................................1
Business of Spa Faucet..........................................................................1
Item 2. Management's Discussion and Analysis............................................................4
Overview .......................................................................................4
Item 3. Description of Properties........................................................................6
Item 4. Security Ownership of Certain Beneficial Owners and Management...................................7
Item 5. Directors, Executive Officers, Promoters and Control Persons....................................10
Item 6. Executive Compensation.........................................................................10
Leonardo Sudman Employment Agreement...........................................................11
Incentive Stock Option Plan....................................................................12
Item 7. Certain Relationships and Related Transactions..................................................12
Item 8. Description of Securities.......................................................................13
Common Stock...................................................................................14
Preferred Stock................................................................................14
Options, Warrants or Calls.....................................................................15
Transfer Agent.................................................................................16
PART II ........................................................................................................17
Item 1. Market Price of and Dividends on the Registrant's Common Equity and Other
Shareholder Matters............................................................................17
Market. ......................................................................................17
Outstanding Shares and Shareholders of Record..................................................17
Dividends......................................................................................17
Item 2. Legal Proceedings...............................................................................18
Item 3. Changes in and Disagreements with Accountants...................................................18
Item 4. Recent Sales of Unregistered Securities.........................................................18
Item 5. Indemnification of Directors and Officers......................................................19
PART F/S ........................................................................................................20
Item 1. Financial Statements....................................................................................20
PART III ........................................................................................................20
Item 1. Index to Exhibits...............................................................................20
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Spa Faucet, Inc. (the "Company"), f/k/a Lintex Resources, Inc., was
incorporated as Lintex Resources, Inc. ("Lintex"), under the laws of the State
of Utah on January 23, 1986. In 1988, Lintex negotiated for and acquired two
wholly owned subsidiaries, each of which was a wholesale distributor of candy
and tobacco products. The two companies were Hansen Candy and Distributing
Company ("Hansen") and Rex Distributing, Inc. ("Rex"). On August 31, 1989, the
former owners of Hansen foreclosed on their secured debt and repossessed all of
Hansen's outstanding shares from the Company. No deficiency against the Company
resulted from the repossession. The Rex assets and liabilities were subsequently
sold and transferred to an employee of the Company due to the fact that such
Company's operations were unprofitable. Rex was subsequently dissolved. The
Company thereafter remained inactive for approximately six and one-half years.
On March 15, 1996, Lintex acquired Spa Faucet, Inc., a privately-held
California corporation, ("Spa Faucet") from its shareholders through the
issuance of 8,400,000 post-split shares of common stock. On March 15, 1996,
Lintex formally changed its name to Spa Faucet, Inc. (the "Company"). As a
result of this acquisition, the Company is now engaged in the business of
designing, manufacturing, marketing and selling mid-price faucets for sale to
home centers and plumbing wholesalers in the United States and Canada. Spa
Faucet is the sole subsidiary of the Company. The Company has no independent
operations of its own, and acts solely as a holding corporation.
BUSINESS OF SPA FAUCET
GENERALLY
The Company currently designs, manufactures, markets and sells for
residential use, a single line of products, faucets, to the moderate-price,
wholesale plumbing industry in the United States and Canada. There are
approximately 116 separate faucets comprising the Company's line.
MARKETING AND SALES: DEPENDENCE ON PRINCIPAL CUSTOMERS
The Company directs the marketing and sale of its product line towards
the moderate-price, wholesale plumbing market in North America. The marketing
efforts of the Company are handled principally by Mr. Leonardo Sudman ("Mr.
Sudman"), Chief Executive Officer, President and a Director and Ms. Marty Sudman
("Ms. Sudman"), Vice President of Marketing and a Director. The sales of the
Company primarily occur through Mr. Sudman, Ms. Sudman and a network of
independent sales persons and representatives who act as brokers of the faucet
line. Mr. Sudman is responsible for the maintenance and performance of this
distribution network. As Vice President of Marketing, Ms. Sudman is responsible
for all research, development and implementation of the
1
<PAGE>
present marketing plan. The expansion of the Company depends, in part, on the
ability of Mr. Sudman to expand his sales network by using additional
independent representatives.
Although there can be no assurances, management believes that many such
representatives will be available to the Company as it expands. The Company does
not intend to enter into formal written contracts with its representatives and
such relationships may be terminated by either the representative or the Company
at any time without penalty.
The marketing and sales efforts of the Company have, in the past, been
directed almost exclusively to the home center market. As a result,
approximately 85% of the Company's current revenues are generated from this
market. For the 1997 fiscal year, sales to Home Depot and Loew's Company, Inc.
accounted for 16% and 53% of the Company's sales respectively. Approximately 350
customers account for the balance of gross revenues. The loss of either of the 2
largest accounts would adversely impact the operations of the Company.
MANUFACTURING
The Company owns the designs and molds from which its faucets are
produced. The actual manufacturing of the faucets, however, occur in two
separate locations, Pogna in Italy and Chung Wha in Taiwan, respectively. Many
of the constituent portions of the faucets are manufactured by sub-contractors
for these two manufacturers, all of which were procured by the Company.
Management feels that the Company's present relationships with its manufacturers
are sufficient to keep up with the anticipated expansion of the Company. As
there are no written contracts between the Company and its manufacturers, the
Company and its manufacturers may terminate their relationships at any time
without penalty.
The Company generally does not order faucets from its manufacturers
until such time as it has an order from a customer. As a result, the Company's
manufacturers primarily ship the Company's products directly to its customers.
This process minimizes the amount of inventory the Company maintains at its
office and warehouse facility which is located in Chatsworth, California. The
Company, therefore, maintains a limited inventory solely to meet unexpected and
expedited small orders.
SOURCES OF SUPPLY; FOREIGN SUPPLIERS
Raw materials for the Spa faucet business consists of brass, copper and steel
which are available from a variety of regular and competitive suppliers. The
Company does not anticipate any difficulty in obtaining raw materials for its
products.
These foreign operations involve hazards shared by most enterprises relying on
foreign sources of supply, such as political risks, currency risks, tariffs and
import controls. To date, the Company has not been adversely affected by these
matters. The Company does not anticipate
2
<PAGE>
problems in maintaining adequate sources of supply.
RESEARCH AND DEVELOPMENT
Mr. Sudman designs the Company's faucets. In this regard, the Company
does not maintain a separate research and development department.
PROPRIETARY RIGHTS PROTECTION
The Company has not applied, nor does it intend to apply for any
trademark, patent, intellectual or other product protection. Therefore, there
can be no assurance that the Company's product designs will not be copied by its
business competitors.
BACKLOG
The dollar amount of backlog of orders believed to be firm for the
Company's products was approximately $1,500,000 as of the end of the 1997 fiscal
year, as compared with approximately $700,000 as of the end of the preceding
fiscal year.
No part of the Company's business is seasonal and all backlog is
expected to be shipped within the current fiscal year.
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with many large companies, such as Delta and Price Pfister.
Furthermore, many medium and small sized companies are active within the
industry. Many of these competitors have financial and other resources
substantially greater than those of the Company. The Company competes on the
basis of price and product performance.
RESEARCH AND DEVELOPMENT
During the last fiscal year, the Company spent approximately $50,000 on Company
sponsored research and development. During the 1996 fiscal year the Company
spent approximately $40,000 for research and development.
SEASONAL ASPECTS
The Company's business is not materially affected by seasonal changes.
EMPLOYEES
Spa Faucet presently has eleven full-time employees, including 2 executive
officers. The
3
<PAGE>
Company enjoys good relations with its employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
OVERVIEW
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
Consolidated sales for fiscal year 1997 were $16,119,132. This was a 53%
increase over consolidated sales in fiscal 1996. At year-end, the backlog of
orders was approximately 2 times higher than it was at last year-end.
The Company's gross profit margins decreased slightly to 23% from 25% reflecting
the efficiencies resulting from increased sales volume, while sales and
administrative expenses increased as a percentage of sales from 20% to 23% for
the same reason.
Interest expense decreased 13% for fiscal year 1997 as a result of higher
borrowing levels related to the increase in sales.
As a result of the above, the Company's net income increased 128% to $415,354
($.03 per share), compared to ($181,627) ($.02) in fiscal 1996.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
Consolidated sales for fiscal year 1996 were $10,504,000. This was a 65% over
consolidated sales in fiscal 1995. At year-end, the backlog of orders was
approximately 2 times higher than it was at last year-end.
The Company's gross profit margins increased to 25% from 22% reflecting the
efficiencies resulting from increased sales volume, while sales and
administrative expenses declined as a percentage of sales from 25% to 20% for
the same reason.
Interest expense increased 44% for fiscal year 1996 as a result of higher
borrowing levels related to the increase in sales.
As a result of the above, the Company's net income increased 145% to $191,070
($.02 per share), compared to a loss of ($345,000) (($.04 per share)) in fiscal
1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded operations primarily through earnings,
stockholder loans and bank borrowings. As of May 31, 1997 the Company had
working capital of approximately $5,104,681 including $109,959 in cash. The
Company also had a line of credit of $3,800,000
4
<PAGE>
collateralized by substantially all of the assets of the Company. On May 31,
1997, approximately $3,295,447 had been drawn under that line of credit, which
bears interest at a rate equal to the bank's prime rate plus 1.0%.
During fiscal 1997, the operations of the Company produced $109,959 of cash. The
major sources of cash were net income ($415,354), depreciation ($178,207) and
increases in accrued expenses ($152,379).
Principal uses of cash were additional investment in inventories ($499,864) and
increased accounts receivable ($137,635).
During fiscal 1997, the Company used approximately $503,483 for the purchase of
machinery and equipment compared to $324,185 for the prior year. Financing
activities consumed approximately $80,316 as the Company paid down long term
debt.
On March 14, 1997, the Company entered into an agreement with Amtrade
International Bank of Florida ("Amtrade"), whereby Amtrade agreed to loan the
Company up to $3,800,000. This obligation is evidenced by Master Revolving
Credit Loans. This Loan is personally guaranteed by Mr. Sudman. In addition,
Amtrade executed a security interest in the Company's equipment, inventory,
accounts, documents, contract rights, chattel paper, instruments and a credit
insurance policy held by Fidelity and Deposit Company of Maryland.
The revolving credit facility matures in April, 1998, subject to earlier
termination. The Company had $3,295,447 outstanding on May 31, 1997.
Under the revolving credit facility, the applicable interest rate is the prime
rate plus 1%.
The revolving credit facility contains customary covenants including, among
others, restrictions on the incurrence of debt, encumbrances on or sales of
assets, mergers and acquisitions, dividends and transactions with affiliates.
ITEM 3. DESCRIPTION OF PROPERTIES.
The Company, as of the date of this filing, owns no real or personal
property, tangible or intangible. The Company's executive offices are located at
8926 Comanche Avenue, Chatsworth, California 91311. These leased facilities
consist of executive offices of approximately 4,000 square feet and warehouse
space of approximately 14,000 square feet. These facilities are well suited for
the Company's operations and have enough space to accommodate the Company's
anticipated growth. The Company has a 3 year lease for the facilities, calling
for monthly payments of $10,600. The lease expires June 30, 2001.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of the close of business on May 31, 1997, there were 16,894,899
shares of Common Stock
5
<PAGE>
and 1,000 shares of Series A: 9% Cumulative, Convertible, Redeemable Preferred
Stock ("Preferred Stock") outstanding. The Common Stock is held by 204 persons
of record and the Preferred Stock is held by one person. Effective March 15,
1996, a reverse 1:40 capital share split was effected by the Company. Effective
October 31, 1996, a forward 3:1 capital share split was effected. All references
to shares of Common Stock in this filing reflect the capital splits set forth
above.
The following table sets forth, as of the close of business on May 31,
1997, the shares of Common Stock owned by each person known by the Company to
own more than 5% of the outstanding Common Stock:
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Amount and Nature of Percent of
Owner Beneficial Owner (1) Class (1)
<S> <C> <C> <C>
Common Stock Milano Internazionale, Inc. (2) 7,800,000 49.59%
Common Stock Exale, Inc. 1,050,000 6.76
- ------------------------ ------------------------------------------ --------------------------------- ----------------
</TABLE>
- --------
(1) For the purposes of this table, "Percent of Class" and "Amount and Nature of
Beneficial Owner" signifies the securities owned by such persons or voting
power which may be acquired, in the next 60 days, through the exercise of
Series A: 9% Cumulative, Convertible, Redeemable Preferred Stock ("Preferred
Stock"). Any shares a person has the right to acquire by the exercise of
Preferred Stock within 60 days are considered to be outstanding only for the
purpose of this calculation.
(2) Mr. Sudman is an officer, director and 70% shareholder of Milano
Internazionale, Inc.
6
<PAGE>
The following table sets forth, as of the close of business on May 31,
1997, the shares of Common Stock owned by all directors, executive officers and
directors and executive officers as a group of the outstanding Common Stock:
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Amount and Nature of Percent of
Owner Beneficial Owner (3) Class (3)
- -------------------------- ----------------------------------------- -------------------------------- ----------------
<S> <C> <C> <C>
Common Stock Mr. Leonardo Sudman (4,5) 3,000,000 19.07
Common Stock Ms. Marty Sudman (6) 0 0
- -------------------------- ----------------------------------------- -------------------------------- ----------------
Common Stock Randy Heath (7) 525,000 3.33
Common Stock All Directors and Officers as a 3,525,000 22.4
Group
- -------------------------- ----------------------------------------- -------------------------------- ----------------
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The executive officers, directors and key employees of the Company are
as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Leonardo Sudman 62 Chief Executive Officer, President, Secretary
and Chairman of the Board of Directors
Marty Sudman 25 Vice-President of Marketing and Director
John Kensey Sales Manager
</TABLE>
- --------
(3) For the purposes of this table, "Percent of Class" and "Amount and Nature of
Beneficial Owner" signifies the securities owned by such persons or voting
power which may be acquired, in the next 60 days, through the exercise of
Series A: 9% Cumulative, Convertible, Redeemable Preferred Stock ("Preferred
Stock"). Any shares a person has the right to acquire by the exercise of
Preferred Stock within 60 days are considered to be outstanding only for the
purpose of this calculation.
(4) Mr. Leonardo Sudman is a Director, the Chief Executive Officer, President
and Secretary of the Company.
(5) Mr. Leonardo Sudman and Ms. Marty Sudman are married.
(6) Ms. Marty Sudman is a Director and the Vice President of marketing for the
Company.
(7) Includes common stock which Mr. Heath has the right to acquire by the
exercise of converting preferred stock which are convertible into common
stock within 60 days. Mr. Heath presently owns 1,000 shares of the Series A:
9% Cumulative, Convertible, Redeemable Preferred Stock of the Company valued
at $1,000 per share ("Preferred Stock"). This series of Preferred Stock (i)
carries a dividend rate of 9% per annum which accumulates quarterly, (ii) is
convertible into common stock on or prior to August 31, 2001, at the lesser
of the market price for the common stock on September 30, 1996 or 70% of the
market price of the common stock on the date of conversion, and (iii) is
redeemable at the election of the Company at a price of $1,500 per share,
plus accrued and unpaid dividends. This series of Preferred Stock does not
vote, does not require a sinking fund for redemption, and does not carry a
liquidation preference.
7
<PAGE>
The Board of Directors of the Company consists of two persons.
Directors serve until the next annual meeting of shareholders or until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
LEONARDO SUDMAN has served as Chief Executive Officer, President and a
Director of the Company since 1986. Mr. Sudman has been involved in the
wholesale plumbing industry for over 40 years. Mr. Sudman received a Bachelor's
Degree in Business Administration in 1956 from Ohio State University.
MARTY SUDMAN has served as Vice-President of Marketing of the Company
since 1992. Ms. Sudman has been a Director of the Company since April 23, 1994.
JOHN KENSEY serves as the Company's Sales Manager and has held that
position since 1995. Mr. Kensey is responsible for the performance of the
independent sales representatives and reports directly to Mr. Sudman. Prior to
his present employment with the Company, Mr. Kensey was the Vice President of
sales for the Moen Corporation.
ITEM 6. EXECUTIVE COMPENSATION.
The following sets forth information concerning compensation paid to
the executive officers of the Company during fiscal years 1995, 1996 and 1997.
No director received any compensation in his or her capacity as such.
<TABLE>
<CAPTION>
The following table sets forth information concerning all remuneration
paid by the Company as of the date of the filing, to the Company's Directors and
all Executive Officers as a group:
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
AWARDS PAYOUTS
Name and Year Salary ($) Bonus ($) Other Annual Restricted Securities LTIP All Other
Principal Compensation Stock Underlying Payouts ($) Compensation
Position ($) Award(s) Options/ ($)
($) SARs (#)
=============== ======== ============= ============= ============== ============= ============= ============ ================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leonardo 1997 300,000 100,000 0 0 0 0 0
Sudman Signing
(Chief Bonus
Executive
Officer and
President)
1995 250,000 15,000 0 0 0 0 0
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
AWARDS PAYOUTS
Name and Year Salary ($) Bonus ($) Other Annual Restricted Securities LTIP All Other
Principal Compensation Stock Underlying Payouts ($) Compensation
Position ($) Award(s) Options/ ($)
($) SARs (#)
=============== ======== ============= ============= ============== ============= ============= ============ ================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 250,000 15,000 0 0 0 0 0
Marty Sudman 1996 95,000 2,500 0 0 0 0 0
(Director and
President)
1995 95,000 1,500 0 0 0 0 0
1994 95,000 1,000 0 0 0 0 0
=============== ======== ============= ============= ============== ============= ============= ============ ================
</TABLE>
LEONARDO SUDMAN EMPLOYMENT AGREEMENT
On June 1, 1997, Mr. Sudman entered into an employment agreement with
the Company which requires his serving the Company as the President and Chief
Executive Officer. This contract has a five year term which began on the date of
the agreement and calls for a base salary payable by increments in arrears of
$350,000 for the first year, $375,000 for the second, $400,000 for the third,
$425,000 for the fourth, and $450,000 for the final year. Pursuant to the
agreement, Mr. Sudman received a signing bonus equal to $100,000, payable June
1, 1997.
The amount of additional bonus compensation shall be determined
annually by a formula to be agreed upon by the Company and Mr. Sudman. The
contract also provides that the Company will pay for insurance (i) on Mr.
Sudman's life aggregating $2,500,000 in death benefits payable to a beneficiary
to be named by Mr. Sudman. This insurance guards against his disability by
covering the full continuation of his salary, and other benefits under the
contract, and on his, his wife's and his dependents' health. The contract also
provides Mr. Sudman with no less than thirty paid vacation days per calendar
year and a reimbursable monthly automobile allowance.
The contract is terminable by the Company for death or disability and
for "just cause," including Mr. Sudman's willful and continued failure to
perform his duties, his engaging in conduct which is injurious to the Company,
his conviction of a criminal offense, and/or his engaging in any intentional act
of dishonesty resulting in his personal gain at the expense of the Company. The
contract is further terminable by the Company without just cause; provided,
however, that the Company must then pay Mr. Sudman within ten days after
termination an amount equal to $2,500,000 multiplied by a fraction the numerator
of which is equal to the number of months remaining on the term of the contract
and the denominator of which is 60, the original monthly term of the agreement,
and the Company must also pay to Mr. Sudman the value of all accrued vacation
pay and other benefits to the date of termination. Mr. Sudman may terminate the
contract for "good reason" if there has been (i) a substantial and adverse
alteration in the nature of his responsibilities with the Company, (ii) the
transfer of 25% or more of the voting stock of the Company, (iii) any merger or
consolidation of the Company into or with another entity, (iv) any sale of all
or substantially all of the assets of the Company or (v) any termination of his
employment by the Company which is not in accordance with the terms of the
agreement. If Mr. Sudman terminates his
9
<PAGE>
employment with the Company for good cause, the Company must pay to him that
amount which it would have been required to pay to him if it had terminated his
employment without cause, as set forth immediately above in this paragraph.
INCENTIVE STOCK OPTION PLAN
On July 7, 1996, the Board of Directors and shareholders of the Company
adopted an incentive stock option plan ("ISOP") for employees of the Company and
its subsidiaries. The ISOP is intended to advance the best interests of the
Company by providing those persons who have a substantial responsibility for its
management and growth with additional incentive by increasing their interest in
the success of the Company, thereby encouraging them to remain in its employ.
Further, the availability and offering of options under the ISOP supports and
increases the ability of the Company to attract and retain individuals of
exceptional managerial talent upon whom, in large measure, the sustained
progress, growth and profitability of the Company will depend. Only employees
who have contributed to the profitability or administration of the Company
and/or its subsidiaries are eligible to participate, and these individuals will
only be entitled to receive that number of shares which fairly reflects the
value of their services. The ISOP is presently being administered by the Board
of Directors. The shares available for grant under the ISOP have not yet been
registered under the Securities Act of 1933, as amended, (the "Securities Act").
All options granted under the ISOP will be evidenced by agreements which will be
subject to the provisions of the ISOP, as well as such further provisions as may
subsequently be adopted. The option price per share will be determined by the
Board of Directors at the date of grant, but will at least equal the fair market
value of the common stock on the date of grant. Any person owning or controlling
10% or more of the voting power of the Company who may receive grants under the
ISOP will have an exercise price equaling or exceeding 110% of the fair market
value. All options must be granted within ten years of the date of the ISOP, and
no option may extend beyond the expiration of five years from the date of grant.
As of the date of this filing, no options had been granted under the ISOP.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From 1993 to 1996, the Company borrowed funds from Mr. Randy Heath
("Mr. Heath"), who was unaffiliated at the time. By May 31, 1996, the amount
outstanding under this obligation approximated $1,077,636.00 (the "Loan"). The
Loan was unsecured, bore interest at the rate of six percent per annum and was
due on demand. On September 30, 1996, the Company entered into an agreement with
Mr. Heath to convert $1,000,000 outstanding under the Loan into 1,000 shares of
the Series A: 9% Cumulative, Convertible, Redeemable Preferred Stock of the
Company valued at $1,000 per share ("Preferred Stock"). This series of Preferred
Stock (i) carries a dividend rate of 9% per annum which accumulates quarterly,
(ii) is convertible into common stock on or prior to August 31, 2001, at the
lesser of the market price for the common stock on September 30, 1996, or 70% of
the market price of the common stock on the date of conversion, and (iii) is
redeemable at the election of the Company at a price of $1,500 per share, plus
accrued and unpaid dividends. This series of Preferred Stock does not vote, does
not require a sinking fund for redemption, and does not carry a liquidation
preference. During the first quarter of fiscal 1997, the Company repaid the
remainder of this obligation in full, leaving no balance outstanding as of the
date of this filing. Due to the issuance of the Preferred Stock and the number
of shares into which it is currently convertible, Mr. Heath is now considered to
be an affiliate of the Company.
10
<PAGE>
On February 5, 1996, the Company entered into an agreement with Eco2
Financial, Inc. ("Eco2"), an affiliate of Mr. Charles Ledford, (the "Eco2
Agreement"). Although Eco2 is no longer a shareholder of the Company, at the
time of the Eco2 Agreement Eco2 had a significant holding of the Company. Under
the terms of the Eco2 Agreement, Eco2 agreed to extend funds to the Company of
up to $2,000,000; provided, however, that the maximum limit of the extended
funds were not to exceed 80% of the then current outstanding accounts
receivables of the Company (the "Loan"). The Eco2 Agreement required the Company
to pay interest on the Loan at the rate of 2% over an expressed prime rate. Each
credit extension was subject to a one-time charge of 1.5% on the amount
extended. The Eco2 Agreement further provided that any letters of credit
obtained by Eco2, on behalf of the Company, pursuant to the Eco2 Agreement,
would require the payment to Eco2 by the Company of a 3.5% fee on the face
amount of the letter of credit on opening (the "Fee"). This Fee was to have been
in exchange for Eco2's success in obtaining the credit facility and its
services. The obligation established by this Eco2 Agreement was evidenced by a
written contract and was secured by a first security interest in all of the
assets of the Company, as well as a personal guarantee of Mr. Sudman.
On March 15, 1996, the sum of $2,000,000 outstanding under the Loan was
converted into 7,800,000 post-split shares of common stock of the Company. These
shares were subsequently sold to an affiliate of Mr. Sudman's. In conjunction
with this conversion, the Company incurred $100,000 in related costs for the
services of third parties. The foregoing conversion satisfied a substantial
portion of the Loan, but at May 31, 1996, left $304,949 still outstanding under
the Eco2 Agreement. During the first fiscal quarter of 1997, the remainder of
the Loan was repaid, which left no amount outstanding under the Loan as of the
date of the filing of this report.
ITEM 8. DESCRIPTION OF SECURITIES.
The Company is authorized to issue 100,000,000 shares of Common Stock,
$.001 par value ("Common Stock") and 10,000,000 shares of Series A: 9%
Cumulative, Convertible, Redeemable Preferred Stock ("Preferred Stock"). As of
the close of business on May 31, 1997, there were 16,894,899 shares of Common
Stock and 1,000 shares of Preferred Stock outstanding.
COMMON STOCK
All shares of Common Stock which are issued and outstanding are fully
paid for and nonassessable. The following is a summary description of the
general terms and provisions of the Company's Common Stock.
11
<PAGE>
DIVIDENDS. Since its inception, the Company has not paid any cash
dividends on its Common Stock. Any declaration in the future of any cash or
stock dividends will be, at the discretion of the Board of Directors and will
depend upon, among other things, earnings, the operating and financial condition
of the Company, capital expenditure requirements, and general business
conditions. There are no restrictions currently in effect which preclude the
Company from granting dividends, with the exception that dividends may not be
paid on the common stock while there are accrued but unpaid dividends on the
Series A: 9% Cumulative, Convertible, Redeemable Preferred Stock. It is the
current intention of the Company to retain any earnings in the foreseeable
future to finance the growth and development of its business.
VOTING RIGHTS. A holder of Common Stock is entitled to one vote per
share on all matters submitted for action by the stockholders. A quorum for the
transaction of business at any meeting of the holders of common stock is
one-third of the shares outstanding. All shares of common stock are equal to
each other with respect to the election of directors; therefore, the holders of
more than 50% of the outstanding common stock present at a meeting at which a
quorum is present and at which directors are being elected can, if they choose
to do so, elect all of the directors. Thus, the holders of as little as 16.51%
of the outstanding common stock could elect directors. The terms of directors
are not staggered. Directors are elected annually to serve until the next annual
meeting of stockholders and until their successor is elected and qualified.
There are no preemptive rights to purchase any additional shares of common stock
or other securities of the Company, nor is cumulative voting applicable to the
election of the Board of Directors.
PREEMPTIVE RIGHTS. The holders of Common Stock are not entitled to
preemptive or subscription rights.
PREFERRED STOCK
The articles of incorporation vest the Board of Directors with the
authority to divide the preferred stock into series and to fix and determine the
relative rights and preferences of the shares of any preferred series
established to the fullest extent permitted by the laws of the State of Utah and
the articles of incorporation with respect to, among other things: (a) the
number of shares to constitute a series and the distinctive designation thereof;
(b) the rate and preference of dividends, if any, and, if so, the time of the
payment of dividends; (c) whether dividends are cumulative and, if so, the date
from which dividends begin accruing; (d) whether shares may be redeemed and, if
so, the redemption price and the terms and conditions of redemption; (e) the
liquidation preferences payable in the event of involuntary or voluntary
liquidation; (f) sinking fund or other provisions, if any, for the redemption or
purchase of shares; (g) the terms and conditions upon which shares may be
converted, if convertible; and (h) voting rights, if any.
Effective September 30, 1996, the Company issued a series of preferred
stock in exchange for the forgiveness of $1,000,000 in debt. The series was
designated as Series A: 9% Cumulative, Convertible, Redeemable Preferred Stock.
There are 1,000 shares in the series, each valued at the capital amount of
$1,000, an aggregate of $1,000,000 in total capital. Dividends accrue quarterly
12
<PAGE>
at the rate of 9% per annum, but are payable in the discretion of the Company
only when funds are available therefor. The capital amount and accrued but
unpaid dividends may be converted, in whole or in part at any time and from time
to time up to and including August 31, 2001, into common stock at the lesser of
market price at the date of issuance, September 30, 1996, or 30% of market price
on the date the holder of a preferred share elects to convert. The series may be
redeemed at the election of the Company at any time and from time to time in
whole or in part by paying $1,500 per share plus all accrued but unpaid
dividends, but only after 30 days prior, written notice, during which time the
holder may convert, if prior to September 1, 2001. The series also carries
standard anti-dilution features, but does not have voting rights, preferential
liquidation rights or a sinking fund for redemption.
OPTIONS, WARRANTS OR CALLS
There are no issued or outstanding warrants or calls entitling any
person to purchase any shares of Common Stock or other securities of the
Company. In addition to the ISOP, as discussed in the "Executive Compensation"
Section above, the options outstanding entitling persons to purchase shares of
the Company's Common Stock is set forth immediately below. Furthermore, the
Company may adopt a plan in the future pursuant to which additional options,
warrants, or calls would be made available to officers, directors and key
personnel as an incentive to attract and maintain their services on behalf of
the Company.
On March 15, 1996, the Company granted three separate options ("Option
1", "Option 2" and "Option 3", respectively and individually) to acquire the
Company's Common Stock until March 14, 1999. The Option 1 granted Alcot Simpson
& Co., Inc. ("Alcot") the right to purchase 600,000 pre-split shares of Common
Stock at an exercise price of $.50 per share or 1,800,000 post-split shares at
an exercise price of $.17 per share. Subsequent to the 1:3 split, Alcot
exercised its right to purchase 1,100,000 on June 26, 1997.
Option 2 granted 100,000 pre-split shares at an exercise price of $5.00
to Stacatto Enterprises, 20,000 of which were exercised prior to the 1:3 split
referenced to herein.
Option 3 granted Randall Heath 500,000 pre-split shares at an exercise
price of $.50 per share. No portion of Option 3 has been exercised at this time.
The shares of Common Stock which may be acquired under Options 1, 2,
and 3 have not been registered under the Securities Act of 1933, as amended, and
there is no obligation for the Company to do so.
TRANSFER AGENT
Fidelity Transfer Company, 1800 South West Temple, Suite 301, Salt Lake
City, Utah, 84115, serves as the transfer agent and registrar for the Company's
Common Stock.
13
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
MARKET. From 1989 to July, 1996, there was not a market for the
Company's Common Stock. As of July, 1996, prices for the shares have been quoted
on the "OTC - Bulletin Board," maintained by the National Association of
Securities Dealers, Inc., as well as the "Pink Sheets" maintained by the
National Quotation Bureau, Inc. The Common Stock is presently traded under the
symbol "DRIP." The following table sets forth the range of high and low bid
quotations for the Company's Common Stock during each calendar quarter since
trading again resumed, each of which has been rounded to the nearest, whole
cent.
- ------------------------------------------------------------------------------
LOW BID HIGH BID
September 30, 1996 1.7917 3.9167
December 30,1996 2-7/8 4-3/4
March 30, 1997 3-5/16 3-3/4
June 30, 1997 7/8 3-1/2
September 30, 1997 7/8 7/8
December 31, 1997 5/16 5/16
- ------------------------------------------------------------------------------
The above prices were obtained from the National Quotation Bureau, Inc.
The quotations represent inter-dealer quotations without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
OUTSTANDING SHARES AND SHAREHOLDERS OF RECORD. As of May 31, 1997, the
transfer ledgers maintained by the Company's Stock Transfer Agent indicated that
there were approximately 16,894,899 shares of common stock issued and
outstanding which were held of record by 204 persons.
DIVIDENDS. Since its inception, the Company has not paid any cash
dividends on its stock. Any declaration in the future of any cash or stock
dividends will be, at the discretion of the Board of Directors and will depend
upon, among other things, earnings, the operating and financial condition of the
Company, capital expenditure requirements, and general business conditions.
There are no restrictions currently in effect which preclude the Company from
granting dividends, with the exception that dividends may not be paid on the
common stock while there are accrued but unpaid dividends on the Series A: 9%
Cumulative, Convertible, Redeemable Preferred Stock. It is the current intention
of the Company to retain any earnings in the foreseeable future to finance the
growth and development of its business.
14
<PAGE>
ITEM 2. LEGAL PROCEEDINGS.
No material legal proceedings to which the Company (or any officer or
director of the Company, or any affiliate or owner of record or beneficially of
more than five percent of the common stock, to management's knowledge) is a
party or to which the property of the Company is subject is pending, and no such
material proceeding is known by management of the Company to be contemplated.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The Company issued 8,400,000 post-split shares of common stock to the
shareholders of Spa Faucet in exchange for all of the outstanding capital of Spa
Faucet on February 26, 1996. The transaction was exempted under the provisions
of Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). Each investor was either accredited and/or sophisticated. No person
received any compensation for the placement of these securities.
The Company, on March 15, 1996, issued 2,700,000 post-split shares of
common stock for cash in a private placement which was exempted from
registration under the provisions of Section 4(2) of the Securities Act. Each
investor was either accredited and/or sophisticated. No person received any
compensation for the placement of these securities.
The Company, effective May 31, 1997, issued 1,000 shares of Series A
Preferred Stock in a private exchange for debt which was exempted from
registration under Section 4(2) of the Securities Act. The investor was
accredited and sophisticated. The sum of $100,000 was paid as compensation for
services in obtaining this exchange.
On March 15, 1996, the Company granted three separate options ("Option
1", "Option 2" and "Option 3", respectively and individually) to acquire the
Company's Common Stock until March 14, 1999. The Option 1 granted Alcot Simpson
& Co., Inc. ("Alcot") the right to purchase 600,000 pre-split shares of Common
Stock at an exercise price of $.50 per share or 1,800,000 post-split shares at
an exercise price of $.17 per share. Subsequent to the 1:3 split, Alcot
exercised its right to purchase 1,100,000 on June 26, 1997.
Option 2 granted 100,000 pre-split shares at an exercise price of $5.00
to Stacatto Enterprises, 20,000 of which were exercised prior to the 1:3 split
referenced to herein.
15
<PAGE>
Option 3 granted Randall Heath 500,000 pre-split shares at an exercise
price of $1.50 per share. No portion of Option 3 has been exercised at this
time.
The shares of Common Stock which may be acquired under Options 1, 2,
and 3 have not been registered under the Securities Act of 1933, as amended, and
there is no obligation for the Company to do so.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Articles of Incorporation the Company has such
authority, as the Utah Business Corporation Act allows to indemnify its officers
and directors to the extent provided for in such statute. The only statute,
charter provision, bylaw, contract or other arrangement under which any
controlling person, director or officer of the Company is insured or indemnified
in any manner against which liability they may incur in their capacity as such
is the Utah Corporation Code, as enacted and in effect upon adoption of the
Articles of Incorporation and Bylaws governing the Company. The provisions of
the Utah Corporation Code provide that the Company may, but is not obligated to,
indemnify against the liability of an individual made a party to a lawsuit
because they were previously or currently a director or officer of the Company,
if such person acted in good faith and reasonably believed his or her actions
were in the best interests of Company. The Company may not indemnify such
persons if they are found liable to the Company in a shareholders derivative
suit or are found liable for having received an improper personal benefit. The
Company is required to indemnify such persons if they are ultimately successful
in the suit. Pending a final determination, the Company may advance funds to
these persons, but only if provision is made for the return of all funds
advanced in the event such persons are subsequently found to be unentitled to
indemnification. The general effect of this statute is to make indemnification
available to the officers and directors of the Company regarding actions taken
in their official capacity, unless they are found liable to the Company for
their actions, they received an improper benefit therefrom, or they did not act
in good faith while reasonably believing their actions were in the best
interests of the Company. Indemnification would include actions of the officers
and directors of the Company taken in connection with this filing. If available
at reasonable cost, the Company intends to maintain insurance against any
liability incurred by its officers and directors in defense of any actions to
which they are made parties by reason of their positions as officers and
directors.
PART F/S
ITEM 1. FINANCIAL STATEMENTS
For information regarding this item, reference is made to the "Index of
Financial Statements."
PART III
16
<PAGE>
ITEM 1. INDEX TO EXHIBITS.*
3.1 Articles of Incorporation and two Amendments dated March 15, 1996
3.2 By-laws
3.3 Preferred Stock Provisions
3.4 Warrants
6.1 Agreement and Plan of Reorganization dated March 13, 1996
6.2 Sudman Employment Agreement
7.1 Amtrade Master Revolving Promissory Note and Extension
23.1 Consent of Counsel
23.2 Consent of Accountant
* To be filed by amendment.
17
<PAGE>
<TABLE>
<CAPTION>
INDEX OF FINANCIAL STATEMENTS
The following documents are filed as part of this Registration
Statement:
Financial Statements
<S> <C>
DESCRIPTION PAGE NO.
Independent Auditor's Report
Consolidated Balance Sheets of the Company audited at May 31, 1997
Consolidated Statement of Operations for 12 Months Ended May 31, 1997
and May 31, 1996
Consolidated Statement of Shareholders' Equity for the Years Ended May 31,
1997 and May 31, 1996
Consolidated Statement of Cash Flows for the 24 Months Ended May 31,
1997 and May 31, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets of the Company at May 31, 1996 and
May 31, 1995
Consolidated Statement of Operations for the Years Ended May 31,
1996 and 1995
Consolidated Statement of Stockholders' Equity for the Years Ended
May 31, 1996 and May 31, 1995
Consolidated Statement of Cash Flows for the Years Ended May 31,
1996 and May 31, 1995
Notes to Consolidated Financial Statements
</TABLE>
Independent Auditors' Report
Consolidated Balance Sheets of the Company at May 31, 1995 and May 31, 1994
Consolidated Statement of Operations for the Years Ended May 31, 1995 and May
31, 1994
Consolidated Statement of Stockholders' Equity for the Years Ended May 31, 1995
and May 31, 1994
Consolidated Statement of Cash Flows for the Years Ended May 31, 1995 and May
31, 1994
Notes to Consolidated Financial Statements
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Company has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: February 11, 1998
18
<PAGE>
SPA FAUCET, INC.
By: /s/ Leonardo Sudman
---------------------------------------------
Leonardo Sudman, Principal Executive Officer
By: Leonardo Sudman
---------------------------------------------
Leonardo Sudman, Principal Financial Officer
19
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
MAY 31, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Auditor's Report 3
Consolidated Balance Sheet 4
Consolidated Statement of Operations 5
Consolidated Statement of Cash Flows 6
Consolidated Statement of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements 8 - 11
-2-
<PAGE>
JERE J. LANE
CERTIFIED PUBLIC ACCOUNTANT
2901 N.W. 112 AVENUE
CORAL SPRINGS, FL. 33065
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders' of
Spa Faucet, Inc. and Subsidiary
8926 Comanche Avenue
Chatsworth, California 91311
I have audited the accompanying consolidated balance sheet of Spa Faucet, Inc.
and Subsidiary (the Company) as of May 31, 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion of these financial
statements based on my audit. The statements of operations, stockholders' equity
and cash flows of Spa Faucet, Inc. and Subsidiary for the year ended May 31,
1996 were audited by other auditors whose report dated October 11, 1996 included
an unqualified opinion.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall consolidated
financial statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly in all respects the financial position of Spa Faucet, Inc. and Subsidiary
as of May 31, 1997 and the results of its operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
August 31, 1997
Coral Springs, Florida
-3-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MAY 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT ASSETS:
Cash $ 109,959
Accounts Receivable 1,669,022
Inventory 1,847,417
Prepaid Expenses 384,294
Purchase Deposits 262,661
Loans Receivable 831,328
--------------
Total Current Assets $ 5,104,681
PROPERTY AND EQUIPMENT 777,688
--------------
TOTAL ASSETS $ 5,882,369
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note Payable to Bank $ 3,295,447
Accounts Payable 216,712
Accrued Expenses 184,590
Current Portion of Long-Term Debt 31,040
--------------
Total Current Liabilities $ 3,727,789
LONG-TERM DEBT 149,276
--------------
TOTAL LIABILITIES 3,877,065
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 Par Value, Authorized 10,000,000
Shares, 1,000 Shares Issued and Outstanding 1
Common Stock, $.001 Par Value, 100,000,000 Shares Authorized,
15,844,899 Shares Issued and Outstanding 15,845
Additional Paid-In Capital 2,218,271
Treasury Stock (227,496)
Accumulated Deficit (1,317)
--------------
TOTAL STOCKHOLDERS' EQUITY 2,005,304
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,882,369
==============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-4-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
NET SALES $ 16,119,132 $ 10,504,247
Cost of Sales 12,386,061 7,845,547
--------------- ---------------
GROSS MARGIN 3,733,071 2,658,700
Selling, General and Administrative Expenses 3,051,401 2,109,125
Interest Expense 224,119 258,505
Other Expenses 100,000
--------------- ---------------
Income Before Income Taxes 457,551 191,070
Provision for Income Taxes 42,197 9,443
--------------- ---------------
NET INCOME $ 415,354 $ 181,627
=============== ===============
Net Income Per Share $ 0.03 $ 0.02
=============== ===============
Weighted Average Number of Common
Shares Outstanding 15,624,591 10,544,817
=============== ===============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-5-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PREFERRED PAID-IN TREASURY ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL STOCK DEFICIT EQUITY
-------------- ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 1, 1995 $ 5,000 $ 213,180 $(598,298) $(380,118)
Net Income for the Year Ended
May 31, 1996 181,627 181,627
Effective Change in Common Stock
in Connection with Stock-for-Stock
Exchange with Lintex Resources, Inc. (2,053) 2,279 226
Private Placement of 900,000 Shares 900 224,100 225,000
Conversion of $1,000,000 Loan into
1,300,000 Shares, Net of Related
Costs of $100,000 1,300 898,700 900,000
---------- ------------- ----------- ------------- ----------- ---------------
BALANCES AT MAY 31, 1996 5,147 1,338,259 (416,671) 926,735
Net Income for the Year Ended
May 31, 1997 415,354 415,354
Private Placement of 215,000 Shares 215 119,960 120,175
Conversion of $1,000,000 Loan into
1,000 Shares of Preferred Stock $ 1 999,999 1,000,000
Capital Transacton Costs in
Connection with New Issuances (69,389) (69,389)
Effective Change in Common Stock
in Connection with Stock Split 10,483 (10,483)
Acquisitions of Treasury Stock $ (227,496) (227,496)
Reverse Deferred Financing Cost
Recorded at May 31, 1996 (100,075) (100,075)
Dividends on Preferred Stock (60,000) (60,000)
---------- ------------- ------------- ------------- ----------- ---------------
BALANCES AT MAY 31, 1997 $ 15,845 $ 1 $ 2,218,271 $ (227,496) $ (1,317) $ 2,005,304
========== ============= ============= ============= =========== ===============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-6-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 415,354 $ 181,627
Adjustments to reconcile net income
to Net Cash Used by Operating Activities
Depreciation and Amortization 178,207 81,943
(Increase) in Accounts Receivable (137,635) (665,004)
(Increase) in Inventory (499,864) (341,690)
(Increase) Decrease in Prepaid Expenses (287,202) 58,432
(Increase) in Purchase Deposits (262,661)
(Increase) in Loans Receivable (831,328)
Decrease in Other Assets 117,000 8,343
Increase (Decrease) in Accounts Payable (89,697) (8,685)
Increase in Accrued Expenses 152,379 32,033
------------- -------------
Net Cash Used by Operating Activities (1,245,447) (653,001)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (503,483) (324,185)
Other 226
------------- -------------
Net Cash Used by Investing Activities (503,483) (323,959)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Note Payable to Bank 1,907,543 201,715
Note Payments to Stockholders' (120,000)
Revolving Loan from Related Party (304,949) 1,304,949
Conversion of Loan to Equity (177,711)
Increase in Long-Term Debt 80,316 100,000
Proceeds from Stock Transactions 120,175 225,000
Capital Transaction Costs (69,389) (200,000)
Acquisitions of Treasury Stock (227,496)
Dividends (60,000)
------------- -------------
Net Cash Provided by Financing Activities 1,268,489 1,511,664
------------- -------------
NET INCREASE (DECREASE) IN CASH (480,441) 534,704
CASH AT BEGINNING OF YEAR 590,400 55,696
------------- -------------
CASH AT END OF YEAR $ 109,959 $ 590,400
============= =============
Supplemental Cash Flow Information:
Cash Paid During the Year for Interest $ 224,119 $ 258,505
============= =============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-7-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ORGANIZATION AND BASIS OF PRESENTATION
Spa Faucet, Inc., and Subsidiary (the Company) are engaged in the business of
importing and distributing on a national basis decorative faucets and
accessories for sale to home centers, plumbing wholesalers and kitchen and bath
design studios.
During the fiscal year ended May 31, 1996 the Company, pursuant to a
stock-for-stock exchange, merged with Lintex Resources, Inc., an inactive,
publicly held Utah corporation. The transaction was a reverse acquisition in
which the capital structure of Lintex survived but the Company was deemed the
accounting acquirer.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash - The Company considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be the equivalent of cash for financial
statement purposes.
Inventory - Inventory consists of merchandise held for sale, which is valued at
the lower of cost (first-in, first-out method) or market, and includes
applicable customs, duty and freight charges.
Property and Equipment - Property and Equipment are stated at cost. Depreciation
is calculated on the various asset classes over their estimated useful lives as
follows:
Tooling 7 years
Equipment, Furniture and Fixtures 5 - 7
Transportation Equipment 5
Leasehold Improvements Lease Term
Revenue and Cost Recognition - Sales and the associated Cost of Sales are
recognized upon shipment of merchandise to the customer. Inventory is considered
purchased when confirmation of shipment to the Company or a customer is
received.
Income Taxes - The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109. Under such standard, deferred taxes are
computed based on the tax liability or benefit in future years of the reversal
of temporary differences in the recognition of income or deduction of expenses
between financial and tax reporting purposes. The principal item resulting in
the difference is depreciation. The net difference, if any, between the
provision for taxes and taxes currently payable is reflected in the balance
sheet as deferred income taxes. Deferred tax assets and/or liabilities are
classified as current or noncurrent based on the classification of the related
asset or liability for financial reporting purposes, or on the expected reversal
date for deferred taxes that are not related to an asset or liability. A
valuation allowance is provided for deferred tax assets that do not meet a "more
likely than not" criterion.
Net Income Per Share - Net income per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period,
as well as common stock equivalents.
Use of Estimates - Management of the Company uses estimates and assumptions in
preparing financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities as well as revenues and expenses. Actual results could
vary from the estimates that management has utilized.
-8-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company's two largest customers accounted for 53% and 16% of the Company's
sales for the year ended May31, 1997. For the year ended May 31, 1996 sales to
those customers accounted for 54% and 20% of the Company's sales.
The Company purchases its products from two manufacturers in Taiwan and one
manufacturer in Italy.
ACCOUNTS RECEIVABLE
The Company reports Accounts Receivable net of allowances for uncollectible
accounts. The allowance for uncollectible accounts at May 31, 1997 and 1996 were
$75,000 and $42,169, respectively.
PROPERTY AND EQUIPMENT
Property and Equipment consists of the following as of May 31, 1997:
Displays $ 463,145
Tooling 374,605
Equipment, Furniture and Fixtures 189,081
Transportation Equipment 146,505
Leasehold Improvements 15,006
------------
Total Property and Equipment 1,188,342
Less: Accumulated Depreciation 410,654
------------
Property and Equipment $ 777,688
============
NOTE PAYABLE TO BANK
The Company has revolving lines of credit with a bank totaling $3,800,000.
Borrowings under this line are payable in full within 150 days from the cash
advance, together with interest thereon at prime plus 1%. This credit facility
is available through October 15, 1997 and is secured by stand letters of credit
totaling $1,500,000 and a first position lien on all company assets including
assignment of a certain customer receivable insurance policy. The amount owed on
these lines of credit as of May 31, 1997 and 1996 were $3,295,447 and
$1,387,904, respectively.
-9-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The provision for income taxes consists of the following:
Year Ended May 31,
1997 1996
---- ----
Federal $ 2,715 -
State 39,482 $ 9,443
---------- ---------
Total $ 42,197 $ 9,443
========= ========
Deferred tax assets are as follows:
Year Ended May 31,
1997 1996
---- ----
Depreciation Methods - $ 5,696
Deferred Tax Assets Due To
Net Operating Loss Carryforward $ 101,771 272,155
---------- ------------
Total Deferred Tax Assets 101,771 277,851
Less: Valuation Allowance (101,771) (277,851)
----------- ------------
Net Deferred Tax Assets $ - $ -
=========== ===========
CAPITAL STOCK TRANSACTIONS
Preferred Stock - During the year ended May 31, 1997 the Company converted a
loan in the amount of $1,000,000 to 1,000 shares of 9%, redeemable convertible
Class A preferred stock. Each share is convertible into the number of restricted
shares of common stock determined by dividing $1,000 and accrued dividends at
the rate of 9% per annum by an amount equal to the lesser of (a) $5 per share
pre-split, or (b) the current market price on date of conversion less 30%.
Conversion rights expire on August 31, 2001. The Company has the right to call
the preferred stock for redemption, in whole or in part, at any time, upon 30
days prior written notice at a price of $1,500 per share of the preferred stock.
If the preferred stock is called for redemption, it may be converted to common
stock by the holder at any time prior to the close of the business day preceding
the date fixed for redemption.
Stock Split - On September 30, 1996 the Board of Directors approved a 3-for-1
split of the Company's common stock effective as of October 31, 1996 for
stockholders of record as of October 15, 1996. The weighted average number of
shares outstanding for net income per share calculations for the fiscal year
ended May 31, 1996 have been retroactively adjusted for the split.
-10-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES
Facilities Lease - The Company leases both its main facility and adjacent
warehouse in Chatsworth, California under noncancellable operating leases
expiring June 30, 2001 and October 31, 2001, respectively. Future minimum lease
payments under the current leases are as follows for the years ending May31:
Main Building Warehouse Total
------------- --------- -----
1998 80,640 42,432 123,072
1999 84,336 42,432 126,768
2000 88,368 42,432 130,800
2001 88,704 42,432 131,136
2002 7,392 17,680 25,072
Rent expense for the years ended May 31, 1997 and 1996 was $105,175 and $86,469,
respectively.
Employment Agreement - The Company has employment agreements with certain
executives providing for base salaries totaling approximately $400,000 in the
fiscal year ended May 31, 1998 and increasing as the agreements expire through
the fiscal year ending May 31, 2002. These agreements also provide for incentive
compensation.
-11-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Spa Faucet, Inc.:
We have audited the accompanying consolidated balance sheet of Spa
Faucet, Inc. (the "Company") as of May 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended May 31, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spa Faucet,
Inc. as of May 31, 1996 and the results of its operations and cash flows for the
years ended May 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
October 11, 1996
New York, New York
-1-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 590,400
Accounts receivable, net of allowance of $42,169 1,531,387
Inventory 1,347,553
Income taxes receivable 39,451
Prepaid expenses and other current assets 57,641
-------------
Total current assets 3,566,432
-------------
FIXED ASSETS, net of accumulated depreciation
and amortization of $221,681 452,412
OTHER ASSETS 17,000
-------------
$ 4,035,844
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable to bank $ 1,387,904
Loan payable to stockholder 304,949
Accounts payable 56,243
Accrued expenses 282,377
-------------
Total current liabilities 2,031,473
-------------
LOAN PAYABLE TO STOCKHOLDER 1,077,636
NOTE PAYABLE 100,000
-------------
Total liabilities 3,209,109
-------------
STOCKHOLDERS' EQUITY :
Preferred stock, $.001 par value, authorized
10,000,000 shares, none outstanding -
Common stock, $.001 par value, 100,000,000 shares
authorized, 5,146,633 shares issued and outstanding 5,147
Additional paid-in capital 1,213,259
Accumulated deficit (391,671)
-------------
Total stockholders' equity 826,735
-------------
$ 4,035,844
=============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this balance sheet.
-2-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1996 AND 1995
1996 1995
------------------ ------------------
<S> <C> <C>
NET SALES $ 10,504,247 $ 6,344,061
COST OF SALES 7,845,547 4,907,102
------------------ ------------------
Gross margin 2,658,700 1,436,959
SELLING, OPERATING AND ADMINISTRATIVE
EXPENSES 2,084,125 1,602,385
------------------ ------------------
Income (loss) from operations 574,575 (165,426)
INTEREST EXPENSE 258,505 179,369
OTHER EXPENSE 100,000 -
------------------ ------------------
Income (loss) before provision for income taxes 216,070 (344,795)
PROVISION FOR INCOME TAXES 9,443 800
------------------ ------------------
Net income (loss) $ 206,627 $ (345,595)
================== ==================
Net income (loss) per share $ 0.02 $ (0.04)
================== ==================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 10,228,423 8,839,899
================== ==================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1995 AND 1996
Additional
Perferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
--------------- -------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 1, 1994 - $ - 200 $ 5,000 $ 213,180
Net loss for the year ended
May 31, 1995 - - - - -
--------------- -------------- --------------- -------------- ----------------
BALANCES, MAY 31, 1995 - - 200 5,000 213,180
Effective change in common stock
in connection with stock-for-stock - - 2,946,433 (2,053) 2,279
exchange with Lintex Resources, Inc.
Private placement of 900,000 shares - - 900,000 900 (900)
Private placement of 1,300,000
restricted shares - - 1,300,000 1,300 998,700
Net income for the year ended
May 31, 1996 - - - - -
--------------- -------------- --------------- -------------- ----------------
BALANCES, MAY 31, 1996 - $ - 5,146,633 $ 5,147 $ 1,213,259
=============== ============== =============== ============== ================
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------------- -----------------
<S> <C> <C>
$ (252,703) $ (34,523)
BALANCES, JUNE 1, 1994
Net loss for the year ended (345,595) (345,595)
May 31, 1995 ----------------- -----------------
(598,298) (380,118)
BALANCES, MAY 31, 1995
Effective change in common stock - 226
in connection with stock-for-stock
exchange with Lintex Resources, Inc.
- -
Private placement of 900,000 shares
Private placement of 1,300,000 - 1,000,000
restricted shares
Net income for the year ended 206,627 206,627
May 31, 1996 ----------------- -----------------
(391,671) $ 826,735
BALANCES, MAY 31, 1996 ================= =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
-4-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (INDIRECT METHOD)
FOR THE YEARS ENDED MAY 31, 1996 AND 1995
1996 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 206,627 $ (345,595)(A)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 81,943 42,085
Increase in accounts receivable (665,004) (101,593)
(Increase) decrease in inventory (341,690) 30,706
Increase in prepaid expenses and other current assets (38,961) (1,077)
(Increase) decrease in income taxes receivable 97,393 (136,844)
Decrease in other assets 8,343 -
Increase in accounts payable 28,138 8,902
Decrease in accrued expenses (4,790) (29,155)
----------------- -----------------
Net cash used by operating activities (628,001) (532,571)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (324,185) (97,816)
----------------- -----------------
Net cash used by investing activities (324,185) (97,816)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in loan payable to bank 201,715 626,972
Decrease in loans payable to stockholders (120,000) (148,758)
Increase in loan payable to stockholder 304,949 -
Increase in note payable 100,000 -
Increase in common stock 147 -
Increase in additional paid-in capital 1,000,079 -
----------------- -----------------
Net cash provided by financing activities 1,486,890 478,214
----------------- -----------------
NET INCREASE (DECREASE) IN CASH 534,704 (152,173)
CASH, BEGINNING OF YEAR 55,696 207,869
----------------- -----------------
CASH, END OF YEAR $ 590,400 $ 55,696
================= =================
(A) Includes interest paid of $258,505 and $179,369 and income taxes paid of $ - and $137,644
in 1996 and 1995, respectively.
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-5-
<PAGE>
SPA FAUCET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business and organization
Spa Faucet, Inc. (the "Company") was incorporated under the laws of the
State of California in 1977. On March 15, 1996, the Company entered
into a stock-for-stock exchange with Lintex Resources, Inc., an
inactive, publicly-held Utah Corporation, which was effective as of
March 31, 1996. The Company is engaged in the business of manufacturing
and distributing decorative faucets and accessories for sale to home
centers, plumbing wholesalers and kitchens and bath design studios, on
a national basis.
(2) Summary of significant accounting policies:
Cash and cash equivalents -
The Company considers all highly liquid debt instruments purchased with
a maturity of 90 days or less to be cash equivalents for financial
statement purposes.
Inventory -
Inventory consists of merchandise held for sale which are valued at the
lower of cost (first-in, first-out method) or market, and includes
applicable customs, duty and freight costs.
Revenue and cost recognition -
Sales and associated cost of sales are recognized upon shipment to the
customer. Inventory is considered purchased when a confirmation of
shipment to the Company or a customer is received.
Fixed assets -
Fixed assets are stated at cost. Depreciation is generally provided on
the straight-line method over the estimated useful lives of the assets.
Fixed asset classifications and the applicable useful lives are as
follows:
Tooling 7 years
Equipment, furniture and fixtures 5-7 years
Transportation equipment 5 years
Leasehold improvements term of lease
-6-
<PAGE>
Net income (loss) per share -
Net income (loss) per share was computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. The weighted average number of common shares outstanding during
the period includes retroactive consideration of the effective change
in common stock in connection with the stock-for-stock exchange with
Lintex Resources, Inc. (see Note (8)), as well as the 3-for-1 split of
the Company's common stock as of October 31, 1996 (see Note (11)).
Income taxes -
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", to account for deferred income
taxes. Deferred taxes, if any, are computed based on the tax liability
or benefit in future years of the reversal of temporary differences in
the recognition of income or deduction of expenses between financial
and tax reporting purposes. The principal item resulting in the
difference is depreciation. The net difference, if any, between the
provision for taxes and taxes currently payable is reflected in the
balance sheet as deferred taxes. Deferred tax assets and/or
liabilities, if any, are classified as current and noncurrent based on
the classification of the related asset or liability for financial
reporting purposes, or based on the expected reversal date for deferred
taxes that are not related to an asset or liability.
Use of estimates -
Management of the Company uses estimates and assumptions in preparing
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results
could vary from the estimates that management uses.
(3) Concentration of business
For the year ended May 31, 1996, three customers accounted for 78% of
the Company's sales. For the year ended May 31, 1995, three customers
accounted for 83% of the Company's sales.
The Company purchases its products primarily from two manufacturers
located in Taiwan and one manufacturer located in Italy.
-7-
<PAGE>
<TABLE>
<CAPTION>
(4) Fixed assets
Fixed assets consist of the following as of May 31, 1996:
<S> <C>
Tooling $336,276
Equipment, furniture and fixtures 214,132
Transportation equipment 114,810
Leasehold improvements 8,875
-----------
674,093
Less: accumulated depreciation
and amortization 221,681
-------------
$452,412
============
(5) Accrued expenses
Accrued expenses consist of the following as of May 31, 1996:
Accrued purchases $ 250,166
Accrued vacation 29,082
Accrued payroll taxes 3,129
-----------
$ 282,377
=============
</TABLE>
(6) Loan payable to bank
The Company has a revolving line of credit with a bank which provides
for maximum borrowings of $1,500,000. Borrowings under this line are
payable in full 150 days from the date of cash advance, together with
interest at 9.25%. This credit facility is available through October
25, 1996 and is secured by standby letters of credit totaling
$1,500,000. As of May 31, 1996, there was $1,387,904 outstanding under
the line of credit.
(7) Loans payable to stockholders
The Company has a finance agreement with a stockholder corporation
whereby up to $2,000,000 is to be available to the Company for letters
of credit and advances. Borrowings are limited to 80% of current
receivables, bear interest at the rate of prime plus 2 percent per
annum and are secured by all of the Company's assets and the personal
guarantee of the Company's President and majority stockholder. On March
15, 1996, the Company completed a private placement of 1,300,000
restricted shares of its common stock to this corporation in
consideration for a $1 million reduction in the Company's loan payable
to the corporation (See note (9)). As of May 31, 1996, there was
$304,949 outstanding under this agreement.
-8-
<PAGE>
The Company has a loan payable to another stockholder with an
outstanding balance of $1,077,636 as of May 31, 1996. The loan bears
interest at the prime rate plus one percent per annum and a maturity
date of 1998. As discussed in Note (11), on September 30, 1996, the
stockholder converted this loan to 1000 shares of the Company's 9%
redeemable, convertible Class A preferred stock.
(8) Stockholders' equity
During the year ended May 31, 1996, the Board of Directors authorized
the establishment of Class A 9% redeemable, convertible preferred stock
consisting of 10,000,000 shares of $.001 par value. Each share is
convertible into the number of shares of common stock ($.001 par value)
determined by dividing $1,000 and accrued dividends at the rate of 9%
per annum by an amount equal to the lesser of (a) the market price on
the closing date, or (b) market price less 30% provided however, that
the conversion right stated in the preceding clause shall not be
exercisable subsequent to August 31, 2001. The Company has the right to
call the preferred stock for redemption, in whole or in part, at any
time, upon 30 days prior written notice at a price of $1,500 per share
of the preferred stock. If the preferred stock is called for
redemption, it may be converted to common stock by the holder at any
time prior to the close of the business day preceding the date fixed
for redemption.
In March 1996, the Company entered into a stock-for-stock exchange with
Lintex Resources, Inc. an inactive, publicly-held Utah corporation. In
connection therewith, the net assets of Lintex Resources, Inc. were
consolidated with the Company under a reverse acquisition. Accordingly,
the stockholders equity reflects the combined interests of the two
corporations since the transaction date.
In March 1996, the Company completed a private placement of 900,000
restricted shares of the Company's common stock pursuant to Rule 504 of
Regulation D promulgated under the Securities and Exchange Act of 1934
(the "Act"). The stock was issued in satisfaction of obligations
incurred in connection with the Company's acquisition of Spa Faucet,
Inc. of California and various private placements of the Company's
common stock.
In March 1996, the Company completed a private placement of 1,300,000
restricted shares of the Company's common stock pursuant to Rule 506 of
Regulation D promulgated under the Act. The stock was issued to a
corporation with whom the Company has a finance agreement, in
consideration for a $1 million reduction in the Company's loan payable
to the corporation. (See Note (7)).
-9-
<PAGE>
In February 1996, the Board of Directors approved the 1996 Stock Option
Plan (the "Plan"). The Plan authorized the grant to key employees,
including officers and Directors who are also employees, of options to
purchase up to 1,000,000 post-split shares of the Company's common
stock (subject to adjustment for such matters as stock splits and stock
dividends), which may be incentive stock options within the meaning of
section 422A of the Internal Revenue Code of 1986, as amended, or
options which do not qualify as incentive stock options. The Plan also
provides for the grant of stock appreciation rights and stock awards to
eligible participants, subject to forfeiture restrictions.
(9) Income taxes
The provision for income taxes consists of the following:
Year Ended May 31, 1996
1996 1995
------- ------
Current:
Federal $ - $ -
State 9,443 800
-------- -------
9,443 800
-------- -------
Deferred:
Federal - -
State - -
-------- ----
- -
-------- ----
Total $ 9,443 $ 800
======== =======
The following is a reconciliation of the federal statutory tax rate
with the efficient tax rate:
Year Ended May 31,
1996 1995
Statutory tax rate 35% 35%
State income taxes, net 5 -
Tax benefit of net operating
loss carryforward (35) (35)
Effective rate - % - %
----- ------
-10-
<PAGE>
Deferred tax assets relate to the following:
Year Ended May 31, 1996
1996 1995
Depreciation methods $ 5,696 $ -
Deferred tax assets due to net
operating loss carryforward 263,405 339,029
------------- ------------
Total deferred tax assets 269,101 339,029
------------- -----------
Less: Valuation allowance (269,101) (339,029)
------------- ------------
Net $ - $ -
============= ==========
The Company has approximately $750,000 of loss carryforwards to offset
future taxable income.
(10) Commitments and contingencies:
Facilities lease -
The Company leases its facility in Chatsworth, California under a
noncancellable operating lease expiring June 30, 1997. Future minimum
lease payments under the current lease are as follows for the year
ending May 31:
1997 $83,871
1998 6,992
Rent expense for the years ended May 31, 1996 and 1995 was $86,469 and
$83,756, respectively.
Employment agreement -
The Company has employment agreements with certain executives providing
for base salaries totalling approximately $350,000 in fiscal 1997 and
increasing as the agreements expire through fiscal 2000. Such
agreements also provide for incentive compensation.
-11-
<PAGE>
Litigation -
The Company is currently involved in several lawsuits arising in the
normal course of business. In management's opinion, based on the advise
of legal counsel, the ultimate outcome of such lawsuits will not have a
material effect on the Company's financial statements.
(11) Subsequent events
Preferred stock -
On September 30, 1996, a loan payable to stockholder in the amount of
$1,030,000 was converted to 1,000 shares of the Company's 9% redeemable
convertible Class A preferred stock.
Litigation settlement -
On September 9, 1996, the Company entered into a settlement agreement
with respect to certain litigation proceedings. In connection
therewith, the Company issued a promissory note in the amount of
$100,000, to be paid over a four year period with interest at 9
percent. As this litigation was outstanding as of May 31, 1996, the
corresponding obligation has been reflected in the accompanying balance
sheet.
Financing agreement -
In July 1996, the Company entered into an inventory purchase order
assignment program with a finance corporation (the "corporation"),
whereby the Company assigns customer purchase orders to the
corporation, and requests the corporation to purchase the required
finished goods to fulfill the purchase orders. The corporation will
provide up to an outstanding balance of $2 million for approval sales
on behalf of the Company, premised on the Company providing sales
transactions which will require a minimum of $8 million in purchases by
the corporation over the upcoming year. The inventory purchase order
assignment program commitment fee is 5 percent of the minimum purchase
requirement, and is payable one year from the date of the agreement.
The commitment fee will be waived in proportion to the extent of the
minimum purchase requirement achieved. Transactions under this program
will result in initiation and set-up fees of 3.5 percent of issued
letters of credit or other amounts advanced, a monthly maintenance fee
equal to 2 percent of amounts advanced, plus a daily material advance
fee of prime plus 4 percent on outstanding amounts. The corporation
shall have a security interest in all assets and the stock of the
Company, as well as the guarantees of the Company's principal
stockholders.
Stock split -
On September 30, 1996, the Board of Directors approved a 3-for-1 split
of the Company's common stock to be effected as of October 31, 1996 for
stockholders of record as of October 15, 1996. The weighted average
number of shares outstanding for net income (loss) per share
calculations have been retroactively adjusted for this stock split.
-12-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Spa Faucet, Inc.:
We have audited the accompanying balance sheets of Spa Faucet, Inc. (a
California corporation; the "Company") as of May 31, 1995 and 1994, and the
related statements of operations, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Spa Faucet, Inc. as
of May 31, 1995 and 1994 and the results of its operations and cash flows for
the years then ended in conformity with generally accepted accounting
principles.
March 8, 1996
New York, New York
-1-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC.
BALANCE SHEETS
MAY 31, 1995 AND 1994
1995 1994
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 55,696 $ 207,869
Accounts receivable, net 866,383 764,790
Inventory 1,005,863 1,036,569
Prepaid expenses and other current assets 18,680 17,603
Income taxes receivable 136,844 -
---------------- ----------------
Total current assets 2,083,466 2,026,831
---------------- ----------------
FIXED ASSETS, net of accumulated depreciation
and amortization of $159,612 and $117,527 in
1995 and 1994, respectively 210,170 154,439
OTHER ASSETS 25,343 25,343
---------------- ----------------
$ 2,318,979 $ 2,206,613
================ ================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Loan payable to bank $ 1,186,189 $ 559,217
Accounts payable 28,105 19,203
Accrued expenses 287,167 316,322
Loan payable to stockholder 106,636 305,394
---------------- ----------------
Total current liabilities 1,608,097 1,200,136
---------------- ----------------
LOAN PAYABLE TO STOCKHOLDER 1,091,000 1,041,000
---------------- ----------------
Total liabilities 2,699,097 2,241,136
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 2,500 shares
authorized, 200 shares issued and outstanding, stated at 5,000 5,000
Additional paid-in capital 213,180 213,180
Accumulated deficit (598,298) (252,703)
---------------- ----------------
Total stockholders' equity (deficit) (380,118) (34,523)
---------------- ----------------
$ 2,318,979 $ 2,206,613
================ ================
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
-2-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1995 AND 1994
1995 1994
---- ----
<S> <C> <C>
NET SALES $ 6,344,061 $ 6,136,465
COST OF SALES 4,907,102 4,660,490
----------------- -----------------
Gross margin 1,436,959 1,475,975
SELLING, OPERATING AND ADMINISTRATIVE
EXPENSES 1,602,385 1,420,094
----------------- -----------------
Income (loss) from operations (165,426) 55,881
INTEREST EXPENSE 179,369 64,973
----------------- -----------------
Loss before provision for income taxes (344,795) (9,092)
PROVISION FOR INCOME TAXES 800 4,772
----------------- -----------------
Net loss $ (345,595) $ (13,864)
================= =================
Loss per share $ (1,727.98) $ (69.32)
================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 200 200
================= =================
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MAY 31, 1995 AND 1994
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
------------ ------------- -------------------- -------------
<S> <C> <C> <C> <C>
Balances, June 1, 1993 $ 5,000 $ 213,180 $ (238,839) $ (20,659)
Net loss for the year ended
May 31, 1994 - - (13,864) (13,864)
------------ ------------- -------------------- -------------------
Balances, May 31, 1994 5,000 213,180 (252,703) (34,523)
Net loss for the year ended
May 31, 1995 - - (345,595) (345,595)
------------ ------------- -------------------- -------------------
Balances, May 31, 1995 $ 5,000 $ 213,180 $ (598,298) $ (380,118)
============ ============= ==================== ===================
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
SPA FAUCET, INC.
STATEMENTS OF CASH FLOWS (INDIRECT METHOD)
FOR THE YEARS ENDED MAY 31, 1995 AND 1994
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (345,595) $ (13,864)(A)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 42,085 30,877
Increase in accounts receivable (101,593) (53,346)
(Increase) decrease in inventory 30,706 (680,564)
Increase in prepaid expenses and other current assets (1,077) (11,321)
Increase in income taxes receivable (136,844) -
Increase in other assets - 129,204
Increase (decrease) in accounts payable 8,902 (52,865)
Decrease in accrued expenses (29,155) (266,852)
----------------- -----------------
Net cash used by operating activities (532,571) (918,731)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (97,816) (125,075)
----------------- -----------------
Net cash used by investing activities (97,816) (125,075)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in loan payable to bank 626,972 (66,960)
Increase (decrease) in loans payable to stockholders (148,758) 1,346,394
----------------- -----------------
Net cash provided by financing activities 478,214 1,279,434
----------------- -----------------
NET INCREASE (DECREASE) IN CASH (152,173) 235,628
CASH, BEGINNING OF YEAR 207,869 (27,759)
----------------- -----------------
CASH, END OF YEAR $ 55,696 $ 207,869
================= =================
(A) Includes interest paid of $179,369 and $64,973 and income taxes paid of
$137,644 and $4,772 in 1995 and 1994, respectively.
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
-5-
<PAGE>
SPA FAUCET, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Business and organization
Spa Faucet, Inc. (the "Company") is engaged in the sale of faucet sets
and related products imported primarily from Taiwan. The Company was
incorporated under the laws of the State of California in 1977. During
the years ended May 31, 1995 and 1994, the Company sustained operating
losses of $345,595 and $13,864, respectively. Management's plans in
regard to this matter include securing additional capital from third
party sources to support increased sales levels and related working
capital requirements.
(2) Summary of significant accounting policies:
Cash and cash equivalents -
The Company considers all highly liquid debt instruments purchased with
a maturity of 90 days or less to be cash equivalents for financial
statement purposes.
Inventory -
Inventory consists of merchandise held for sale which are valued at the
lower of cost (first-in, first-out method) or market, and includes
applicable customs, duty and freight costs.
Revenue and cost recognition -
Sales and associated cost of sales are recognized upon shipment to the
customer. Inventory is considered purchased when a confirmation of
shipment to the Company or a customer is received.
Fixed assets -
Fixed assets are stated at cost. Depreciation is generally provided on
the straight-line method over the estimated useful lives of the assets.
Fixed asset classifications and the applicable useful lives are as
follows:
Tooling 7 years
Equipment, furniture and fixtures 5-7 years
Transportation equipment 5 years
Leasehold improvements term of lease
-6-
<PAGE>
Net loss per share -
Net loss per share was computed by dividing net loss by the weighted
average number of common shares outstanding during the period.
Income taxes -
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", to account for deferred income
taxes. Deferred taxes, if any, are computed based on the tax liability
or benefit in future years of the reversal of temporary differences in
the recognition of income or deduction of expenses between financial
and tax reporting purposes. The principal item resulting in the
difference is depreciation. The net difference, if any, between the
provision for taxes and taxes currently payable is reflected in the
balance sheet as deferred taxes. Deferred tax assets and/or
liabilities, if any, are classified as current and noncurrent based on
the classification of the related asset or liability for financial
reporting purposes, or based on the expected reversal date for deferred
taxes that are not related to an asset or liability.
Use of estimates -
Management of the Company uses estimates and assumptions in preparing
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results
could vary from the estimates that management uses.
(3) Concentration of business
For the year ended May 31, 1995, 3 customers accounted for 83% of the
Company's sales. For the year ended May 31, 1994, 3 customers accounted
for 77% of the Company sales.
The Company purchases its products primarily from two manufacturers
located in Taiwan and one manufacturer located in Italy.
-7-
<PAGE>
<TABLE>
<CAPTION>
(4) Fixed assets
Fixed assets consist of the following as of May 31, 1995 and 1994:
1995 1994
---- ----
<S> <C> <C>
Tooling $ 126,549 $ 75,347
Equipment, furniture and fixtures 159,674 113,060
Transportation equipment 74,684 74,684
Leasehold improvements 8,875 8,875
----------- -----------
369,782 271,966
Less: accumulated depreciation
and amortization 159,612 117,527
----------- -----------
$210,170 $154,439
========== ===========
</TABLE>
<TABLE>
<CAPTION>
(5) Accrued expenses
As of May 31, 1995 and 1994, respectively, accrued expenses are
comprised of the following:
<S> <C> <C>
Accrued purchases $ 286,989 $ 308,222
Other, net 178 8,100
----------- -----------
$ 287,167 $ 316,322
============ ===========
</TABLE>
(6) Loan payable to bank
The Company has a revolving line of credit with a bank which provides
for maximum borrowings of $1,500,000. Borrowings under this line are
payable in full 150 days from the date of cash advance, together with
interest at the prime rate plus one percent. This credit facility is
available through February 15, 1997 and is secured by standby letters
of credit totalling $1,500,000, As of May 31, 1995 and 1994,
respectively, there was $1,186,189 and $559,217 outstanding under the
line of credit.
(7) Loans payable to stockholders
The Company has a loan payable to a stockholder with outstanding
balances of $106,636 and $305,394 as of May 31, 1995 and 1994,
respectively. The loan is non-interest bearing, payable on demand and
is currently being repaid through minimum monthly payments of $10,000.
-8-
<PAGE>
The Company has a loan payable to another stockholder with outstanding
balances of $1,091,000 and $1,041,000 as of May 31, 1995 and 1994,
respectively. The loan bears interest at the prime rate plus one
percent per annum and will mature in 1998.
(8) Income taxes
As of May 31, 1995 the Company has approximately $600,000 of net
operating loss carryforwards to offset future taxable income. As it is
currently more likely than not that the resulting deferred tax benefits
will not be realized, a valuation allowance has been recognized for
such deferred tax assets.
(9) Commitments and contingencies
Facilities lease -
The Company leases its facility in Chatsworth, California under a
noncancellable operating lease expiring June 30, 1996. Future minimum
lease payments under the current lease are as follows for the years
ending May 31:
1996 $83,472
1997 6,956
Rent expense for the years ended May 31, 1995 and 1994 was $83,756 and
$68,456, respectively.
Litigation -
The Company is currently involved in several lawsuits arising in the
normal course of business. In management's opinion, based on the advise
of legal counsel, the ultimate outcome of such lawsuits will not have a
material effect on the Company's financial statements.
(10) Subsequent event
In Feburary 1996, the Company entered into a finance agreement with a
corporation whereby up to $2,000,000 is to be available to the Company
for letters of credit and advances. Borrowings are limited to 80% of
current receivables, bear interest at the rate of prime plus 2 percent
per annum and are secured by all of the Company's assets and the
personal guarantee of the Company's President and majority stockholder.
In connection with this financing agreement, the corporation will be
granted a 4.9% equity interest in the Company at no or nominal cost.
-9-
