U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended August 31, 1997
Transition report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from __________ to __________
Commission file number 0-13049
WATER-JEL TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
New York 13-3006788
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
488 Madison Avenue, New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 753-5511
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock
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(Title of Class)
A Warrant
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(Title of Class)
B Warrant
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes X No_____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $62,885,464
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. $7,599,018 as of November 15, 1997.
Documents Incorporated by Reference: See Footnotes to Exhibits
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Item 1. Description of Business
Introduction
Water-Jel Technologies, Inc., (the "Company") is a New York corporation
established in September 1979 to develop, manufacture, and market products using
its "Water-Jel" gel as an emergency first aid product for burn injuries. The
Company also manufactures and markets a line of generic creams and ointments.
In July 1996, the Company acquired all of the outstanding stock of
Journeycraft, Inc. ("Journeycraft"), a New York corporation, and TheraCom
Integrated Medical Communications, Inc. ("TheraCom"), a New York corporation.
These acquisitions have significantly expanded the scope of the Company's
operations to include three new business areas, each larger than its historical
business. These new businesses provide a wide variety of innovative services for
enhancing corporate productivity.
The Company's subsidiary Journeycraft has two operating divisions. The
X-Ceed Performance Group division ("X-Ceed") provides services to major
corporations in the field of performance improvement and corporate
communications, including pioneering use of Internet technology. The
Journeycraft Travel Management division ("Journeycraft") provides travel
management for corporate customers. The Company's other subsidiary, TheraCom, is
engaged in training and communications in the healthcare industry along with the
creation and marketing of innovative products for patient education, especially
in the women's healthcare field.
General
Companies today operate in an increasingly competitive global economic
environment. Companies which achieve increased productivity consistently survive
and prosper. While reengineering efforts have gone to some length in increasing
productivity, ultimately, it's a company's human resources and affiliations
which must ensure consistently enhanced productivity. Corporate executives
recognize that it requires training, communications, motivation and recognition
to spur individuals to increase performance. The Company believes that through
its subsidiaries, Journeycraft and TheraCom, it markets and provides a concrete
and sophisticated array of services along with innovative delivery vehicles to
assist corporations in a targeted and measurable way to increase personnel
productivity.
The new businesses acquired by the Company have followed a common
approach. Each began with an established basic business: sales awards programs,
improvement of communications skills of healthcare professionals and the
providing of sophisticated travel agency services. These basic businesses served
as platforms from which the Company launched expanded services using advanced
information technology such as the Internet, wider applications of its existing
services, and new, productivity enhancing products.
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Set forth below is a detailed description of the businesses and
operations of the Company and its subsidiaries.
JOURNEYCRAFT SUBSIDIARY
This subsidiary has two operating divisions, X-Ceed and Journeycorp.
X-CEED DIVISION
Business
This division assists corporate clients in establishing performance
improvement programs, designed specifically for each client. While traditionally
performance improvement programs focused on increased sales, X-Ceed has expanded
the programs to enable clients to achieve a higher degree of quality assurance
and/or personnel motivation and consumer loyalty. Consumer loyalty programs have
become an integral and extremely successful part of marketing efforts for
companies such as airlines, telephone and credit card companies, and the Company
is endeavoring to expand this service.
Invariably, successful performance improvement programs entail an award
for the winning participants. Awards take the form of merchandise, individual
and/or group travel, debit or credit cards and gift certificates. As part of its
services, X-Ceed analyzes the demographics of a program's participants and
arrives at the type or mix of awards best suited for the corporate client in
terms of the clients' budget parameters and business objectives. Each program
devised by X-Ceed is tailor-made for the specific corporate client.
Critical to the success of any performance improvement program is the
need for communication. At the outset of any performance improvement program it
is necessary to communicate the business objectives and contest rules to program
participants and to continue to sustain a high level of excitement and
enthusiasm for the program's objectives throughout the life of a program, which
can range from three months to one year. This ensures that the program sponsor
achieves a proper return of investment. Likewise, it is important for the
program participants to know their current standing or progress in the program.
X-Ceed has recognized that a sound awards program also serves as a vehicle for
training to enhance the company's marketing and promotional efforts. Such
training can be directed to improvement of sales skills and product familiarity
or achievement of high quality assurance.
In September 1997, X-Ceed introduced "Maestro", a proprietary Inter-
and Intranet software technology which integrates the key functions of training
information, motivation, and sales tracking in one comprehensive system. The
technology also enables instant monitoring and measuring of performance by
management which is crucial to the success of any awards program. "Maestro" will
be made available as an option to X-Ceed's
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corporate clients under individual license agreements in conjunction with
X-Ceed's delivery of all or any of the performance improvement-related services
such as awards, training, sales tracking/reporting and group travel promotion
and communications. The maximum licensing period is for one year and/or for the
life cycle of the accompanying performance improvement program conducted by
X-Ceed for a customer by utilizing Maestro as the delivery vehicle. The
licensing fee is subject to numerous factors such as the extent of the client's
usage of Maestro's features and the extent and nature of the performance
improvement program delivered to the customer. X-Ceed also charges customary
service fees for the hosting and maintenance of web sites and contractual fees
for customization of technology features outside the parameters delivered by
Maestro.
The Company believes that Maestro will in the future significantly
increase the Company's market share of performance improvement services, which
is estimated at $3 billion annually. However, there can be no assurance that
Maestro will significantly increase revenues.
X-Ceed derives its revenues from both service fees from clients for
establishing and monitoring performance improvement programs as well as from
mark-ups on the merchandise and/or services provided as awards. In this
connection, and with respect to travel related awards, the Company sources
services such as hotel accommodations, food and beverage, entertainment, stage
production, and transportation. These services form the integral components of a
group travel program. Such group travel program components are purchased at net
rates and marked up by X-Ceed. With respect to non-travel based performance
improvement programs involving awards for merchandise and/or gift certificates,
these items are purchased by X-Ceed from manufacturers and/or manufacturers'
representatives at discounted prices and are subject to contractually agreed
mark-ups.
X-Ceed provides services to numerous corporate customers in various
industries such as telecommunications, office equipment, pharmaceuticals,
insurance and electronics. A majority of its corporate customers are repeat
customers.
In the fiscal year ended August 31, 1997 ("fiscal 1997") X-Ceed had
revenues of approximately $36,850,000, accounting for approximately 59% of the
Company's total revenues. See "Item 6: Management's Discussion of Financial
Condition and Results of Operations." X-Ceed markets its services through direct
contacts by sales representatives with corporate sales, marketing and human
resource executives. X-Ceed has 36 employees with offices in Atlanta and Los
Angeles as well as its office in the New York City Headquarters.
Approximately 66% of X-Ceed's revenue were derived from two clients:
one customer represented 35% and another 31% of the division's revenues. A loss
of any one of these customers or a reduction in fees paid by any one of these
customers could have a material effect on X-Ceed's revenues in the future. The
Company is concentrating on
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building a wider client base but there can be no assurance that the Company will
be successful.
The Company considers its Internet technologies to be proprietary and
protects its proprietary information with standard secrecy agreements. The
Company does not have, but intends to apply for, copyright protection for
certain of its proprietary Intranet software. The Company may have limited legal
recourse should this proprietary information be disclosed publicly or to
competitors.
Competition
With respect to competition, numerous companies provide incentive or
performance improvement services, some of which are significantly larger and
have access to more extensive resources than the Company. These include Maritz,
Inc., Carlson Marketing Group, BI Performance Services, and S&H Citadell. In
addition, new competitors are continually forming in the area of Internet
services. X-Ceed also competes with corporations' internal motivation staffs and
efforts. X-Ceed competes on the basis of innovative programs, price and the
quality of services.
JOURNEYCORP DIVISION
Business
The Journeycorp division provides comprehensive travel services
primarily for business travel by corporate clients. Travel services include trip
planning, reservations, ticketing, and other incidental services. In addition,
the Company acts as a consultant regarding corporate travel policy and travel
budgeting. For these purposes the Company has created a management system which
analyzes a corporation's historical travel expenses data in order to develop a
definitive corporate travel policy and to enable the client to budget on an
ongoing basis. The system also captures travel expense data and provides the
client with a program to plan, account for and control travel and entertainment
expenses. Like the X-Ceed division, Journeycorp uses Internet technology and
software to facilitate direct booking through the Internet, to access current
data via e-mail and to quickly create travel expense reports and analyses.
The basic services, such as trip planning and reservations, are
delivered through a variety of service configurations. Customers are serviced
out of a Reservations Center or via a dedicated group of travel counselors
located on a customer's premises ("on-site"). The Company maintains Reservations
Centers in New York City (2), Chicago (1), New Jersey (1) and Los Angeles (1),
and ten (10) on-sites. These services are supported by management functions such
as customer service, MIS (Management Information Systems) and technology from
the headquarters location in New York City.
Journeycorp derives its revenues primarily from commissions and fees
generated from travel bookings, and from hotels, car rental companies and other
travel suppliers. In
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addition, a portion of the Company's revenues are derived from management or
consulting fees charged to certain selected accounts.
An industry journal estimates that out of 30,000 travel agencies
Journeycorp's corporate travel business currently ranks between 35th and 40th in
size in the United States with a higher ranking position in the New York
metropolitan area. While the Company does not concentrate in any particular
industries, its client base predominantly consists of companies in financial
services, entertainment and retail marketing, all of which tend to be located in
New York and California. The Company currently has several hundred clients which
include Bloomberg Financial Services, Inc., Schroeder & Co., Tiffany's and
Phillips Van Heusen. The Company normally formalizes its working relationship
with clients through agreements which can range from one to three years and
which are normally cancelable by either party upon 60 to 90 days notice.
In fiscal 1997, Journeycorp had revenues of $11,571,000, accounting for
approximately 18% of the Company's total revenues. Journeycorp markets its
services through direct contacts by sales representative with executives,
targeted direct mailings, and participation in trade shows. Journeycorp
currently has 125 employees with offices in Los Angeles, Chicago and Teaneck,
New Jersey as well as two offices in New York City. In addition, Journeycorp
operates on-site at many clients and uses the services of a number of associated
independent travel agents.
Strategy
The travel industry is undergoing its most crucial transition since
deregulation in the early 1970s. As a result of cost efficiency initiatives and
capacity reductions of the major airlines along with enhanced technologies, the
industry is shifting from a commission to a fee based business. In 1995, most
major carriers capped domestic airline commissions at $50 per round-trip tickets
or 10% for round-trip tickets below $500 of ticket value. In September of 1997,
major airlines followed up with reductions of domestic and international
commissions to 8%. It is the airlines' intention to shift distribution costs
from the carriers to the corporate customers. In the absence of
operations-sustaining commission income, travel companies are forced to
supplement revenues with management and/or transaction fees charged to the
customers.
Journeycorp will continue to reorient its customer relationships
towards fee-based travel management, consulting and MIS systems with a
particular emphasis on on-line technology to achieve internal cost-efficiencies
and to assist customers in increasing the efficiency of their travel operations.
However, in light of the drastic changes in the airline industry, there can be
no assurances that the Company will be able to generate significant revenues.
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Competition
Vigorous competition is encountered in the travel business from more
than 30,000 travel agents and direct sales by airlines and travel suppliers in
the U.S. and abroad. This competition is mainly based on service, convenience
and proximity to the customer and has increased due to several factors in recent
years, including the fact that a number of independent agencies have been
acquired by larger travel companies. Travel agency groups also have increased
services to regional and national business travel clients and in other
activities. In additions, many companies have established in-house travel
departments. Companies are also seeking alternative channels to make travel
arrangements, such as on-line vendors or in some cases "ticketless" airline
services.
American Express is the largest provider of corporate as well as other
travel services. Other major competitors in Journeycorp's regional markets are
VTS Travel, Direct Travel, and McGregor Travel Management. In addition to
American Express, many of the Company's other competitors are significant larger
and have access to more extensive resources than the Company.
THERACOM SUBSIDIARY
Business
The TheraCom subsidiary provides integrated training, communication and
data to the healthcare industry. Traditionally, meetings to provide medical
information to healthcare professional have been paid for by major
pharmaceutical companies. However, by law such meetings must be organized and
controlled by independent third parties. TheraCom provides all the services
necessary to organize such meetings, such as locating speakers, publicity, and
travel and meeting place arrangements. TheraCom also provides ongoing data flow
and feedback to and from pharmaceutical manufactures and healthcare
professionals such as physicians and pharmacists.
From this base, TheraCom has expanded into providing healthcare
information services beyond these traditional channels. The most important of
these new areas is patient education. With increasing competition and cost
pressures, the healthcare industry has recognized that communicating medical
information directly to patients reduces usage of medical services, attracts
patients, and helps create a cooperative atmosphere that minimizes malpractice
litigation. One successful program introduced by TheraCom has been a guide on
menopause. Rather than simply producing program materials, TheraCom focuses on
training healthcare professionals at hospitals, public health agencies, managed
care companies, and corporate "wellness" departments in effective presentation
of its programs. In particular, TheraCom focuses on making such programs
interactive rather than simply lectures.
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In fiscal 1997, TheraCom had revenues of approximately $9,162,000.
These revenues are derived from one customer, Pfizer, Inc. TheraCom has 7
full-time employees and operates from an office in Glen Rock, New Jersey.
Strategy
TheraCom intends to expand its healthcare information business and
intends to expand its patients education business by creating new programs and
marketing its current programs. This latter effort is especially important in
reducing the Company's dependence on Pfizer, Inc. Another significant area of
expansion will be extending healthcare information programs to healthcare
professionals such as paramedics, practical nurses, physicians' aides and others
who are becoming increasingly important under managed health care. However,
there can be no assurance that the Company will be successful in expanding its
base.
Competition
The medical communication industry is large and diverse with extensive
competition among many companies in both traditional medical information
meetings as well as patient education. Advertising agencies are major new
competitors in the healthcare information business. These and many other
competitors are significantly larger, have been in existence longer, and have
access to more extensive resources than the Company. The quality of service,
price and the innovative nature of its programs are the major areas in which
TheraCom competes.
WATER-JEL (the parent)
Water-Jel's business comprised the Company's principal business prior
to the acquisition of Journeycraft and TheraCom as wholly owned subsidiaries.
Water-Jel currently manufactures and markets two product lines: the "Water-Jel"
first aid product line for burns, and the "WJ" generic creams and ointments.
The "Water-Jel" first aid product line consists of a line of emergency
first aid and fire blankets and burn dressings primarily marketed to industry.
The Company also offers two of its products, "Water-Jel Burn Dressing" and the
"Water-Jel Burn Jel" on a limited basis to the consumer marketplace. The fire
blankets provide emergency first aid to burn victims and help trapped
individuals escape a fire. "Water-Jel" sterile burn dressings provide emergency
first aid for victims who have small area body burns. "Water-Jel Burn Jel" is a
topical gel designed for minor spot burns and "Water-Jel UnBurn" is a topical
gel designed specifically for sunburns. "Water-Jel Cool-Jel" is a moisturizing
topical cooling gel which can be used for relief of minor burns, cuts and
scrapes.
The "WJ" brand generic creams and ointments line consists of first aid
cream, maximum strength hydrocortisone cream and a triple antibiotic ointment.
The Company also provides private label packing to some of its customers.
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The Company markets its products to the domestic and international
industrial market and on a limited basis to the consumer marketplace. Its
distribution is comprised of customers who are well established in the first aid
and safety markets. The Company promotes its product lines through advertising
in trade journals and representation in major trade shows.
In fiscal 1997, Water-Jel's sales were approximately $5,296,000,
accounting for approximately 8% of the Company's total revenues. Water-Jel
employs 25 people, and operates its manufacturing and warehousing from its
17,700 square foot facility located in Carlstadt, New Jersey. The Company has an
additional 9,600 square feet of warehouse space available near its main
facility.
Government Regulation
Water-Jel's products and manufacturing practices are subject to
regulation by the Food and Drug Administration ("FDA") as well as by similar
foreign authorities. FDA requirements include adherence to good manufacturing
practices, proper labeling, and either premarket notification or premarket
approval (depending on the category of product) prior to commercial marketing in
the United States.
The Water-Jel Fire Blanket and Burn Dressings are medical devices
subject to regulation by the FDA. The Company has effective filings of premarket
notification for these products under Section 510(k) of the Medical Device
Amendments to the Federal Food, Drug, and Cosmetic Act. Water-Jel's generic
creams and ointment, "Burn Jel" and "UnBurn" line are classified as over the
counter ("OTC") drugs. The Company has the necessary good manufacturing practice
and quality controls to manufacture such over-the-counter drugs in its facility.
The Company is also subject to periodic inspections by the FDA relating
to good manufacturing practices. The FDA has the authority to require a
suspension of manufacturing operations if it finds serious deficiencies.
Additional regulation may, in the future, be imposed by Federal, state or local
authorities, particularly the FDA. Any new products will also be subject to
review of various regulatory authorities in virtually every foreign country in
which such products are offered for sale.
Patents and Trademarks
As a result of research and development efforts in modifying and
improving the Water-Jel line and in January 1995, the Company was granted a
patent for a synthetic fabric containing a therapeutic, non-toxic, water-soluble
and bio-degradable gel used in the burn dressing product line. In September
1996, the Company was granted a patent for a water-based formulation which can
be used for the treatment of sunburns. This product is marketed under the name
"UnBurn." The Company has obtained United States and foreign registrations for
several trademarks for use on the Company's products. These marks and logos are
used on the packaging of the Company's products.
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Competition
The market in which Water-Jel currently operates is characterized by
competition and rapid technological change. Other firms, including Spenco
Medical Corporation, C.R. Bard, Inc. and Johnson & Johnson Products, Inc.,
manufacture and market fire blankets, burn dressings and related fire safety
products and have been in business for a longer period of time, are better
established, have financial resources substantially greater, and have more
extensive facilities than those which now, or in the foreseeable future, may be
available to the Company. While some segments of the market are dominated by
large manufacturers, other segments of the market are characterized by intense
competition among independent product manufacturers. One manufacturer, Nortrade
International Inc. ("Nortrade") offers a burn product line similar to that of
the Company's. Management believes that Nortrade does not pose any significant
competition.
In the opinion of the Company's management, the Company's burn first
aid products are superior to the dry "fire" blankets and antiseptic sprays,
combination of salve covered with sterile gauze and sterile pre-wetted dressing
of its competitors. Water-Jel products cool the wound by removing excess heat
and loosen burned-on clothing. While dry "fire" blankets extinguish a fire by
oxygen deprivation or smothering, the Company's Water-Jel Fire Blankets also
remove excess heat from the victim's body and clothing by wetting and cooling,
thereby reducing the possibility of re-combusting. Also, Water-Jel Burn
Dressings come in a single unit and maintain their moistness longer than
dressings pre-wetted only with water.
Item 2. Description of Property
The Company leases a variety of offices and facilities for its
operations as summarized below:
Location Size and Nature of Facility Lease Expires
New York City Office, 22,300 square feet 2008
Office, 1,100 square feet 1998
Carlstadt, NJ Office, Factory 17,700 square feet 1998
Warehouse, 9,600 square feet 1999
Los Angeles Office, 2,800 square feet 1998
Atlanta Office, 2,700 square feet 2000
Chicago Office, 3,000 square feet 1999
Glen Rock, NJ Office, 2,800 square feet 2001
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Item 3. Legal Proceedings
There is no material litigation currently pending against the Company,
its officers or employees.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholder vote in the fiscal quarter
ended August 31, 1997.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on NASDAQ under the symbol "XCED."
The Class A Warrants also trade on NASDAQ under the symbol "XCEDZ." The
Company's Class B Warrants were delisted from NASDAQ on March 23, 1995. They are
listed on the "Bulletin Board" (the "Pink Sheets") under the symbol "XCEDW."
There has been no market activity in the Class B Warrants.
The following table sets forth the high and low bid prices for the
Company's Common Stock and Class A Warrants for the periods indicated. There
were no prices available for the Class B Warrants. Information for all periods
is as reported by NASDAQ. The figures shown represent interdealer prices,
without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions. The following table gives retroactive effect to a
one-for-eight reverse stock split effected in November 1994.
High Bid Low Bid
Common Stock
Fiscal Year Ended August 31, 1997
1st Quarter ended November 30, 1996 4 3/8 2 3/8
2nd Quarter ended February 28, 1997 3 3/8 1 3/4
3rd Quarter ended May 31, 1997 2 1/4 1 1/2
4th Quarter ended August 31, 1997 4 3/16 2 13/16
Fiscal Year Ended August 31, 1996
1st Quarter ended November 30, 1995 1 11/16 1 -
2nd Quarter ended February 28, 1996 3 3/8 1 3/8
3rd Quarter ended May 31, 1996 5 3/4 2 1/4
4th Quarter ended August 31, 1996 4 5/8 2 7/16
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Class A Warrants
Fiscal Year Ended August 31, 1997
1st Quarter ended November 30, 1996 2 - 1 -
2nd Quarter ended February 28, 1997 1 1/16 7/16
3rd Quarter ended May 31, 1997 11/16 5/16
4th Quarter ended August 31, 1997 1 1/2 5/16
Fiscal Year Ended August 31, 1996
1st Quarter ended November 30, 1995 13/32 9/32
2nd Quarter ended February 28, 1996 1 3/4 1/4
3rd Quarter ended May 31, 1996 4 1/2 1 -
4th Quarter ended August 31, 1996 3 1/16 1 7/16
As of November 15, 1997 the approximate number of beneficial holders of
the Common Stock of the Company was 4,400, based on information received from
the transfer agent and those brokerage firms who hold the Company's securities
in "street name."
The Company has not paid any cash dividends since its inception. By
reason of its present financial status and contemplated financial requirements,
the Company does not anticipate paying any cash dividends in the foreseeable
future. It is anticipated that any earnings will be used to finance the
Company's growth.
Item 6. Management's Discussion of Financial Condition and Results of
Operations
During the fourth quarter of fiscal 1996, the Company acquired all of
the outstanding stock of Journeycraft and TheraCom in exchange for 3,500,000
shares of the Company's Common Stock. This acquisition was accounted for as a
"pooling of interest." Consequently, the Company's fiscal 1996 financial
statements are based on the assumption that the companies were combined for the
full year.
Results of Operations
Net sales for the fiscal years ended August 31, 1997 ("fiscal 1997")
and August 31, 1996 ("fiscal 1996") approximated $62,885,000 and $54,864,000,
respectively, representing a 15% increase. Net sales for all of the Company's
divisions increased during fiscal 1997. The TheraCom division, with its Grant
and Speaker Programs to the healthcare industry, and the X-Ceed division, with
its ongoing Incentive Program and marketing of its Internet website technology,
accounted for approximately 77% of the total increase.
Cost of revenues for fiscal 1997 approximated $40,095,000 as compared
to $34,933,000 for fiscal 1996, representing 64% of net sales in each period.
Selling,
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administrative and general expenses for fiscal 1997 approximated $18,420,000
(29% of net sales) as compared to approximately $18,683,000 (34% of net sales)
in fiscal 1996. The decrease, as a percentage of sales, reflects the increase in
revenues without the need to expand the Company's sales and administrative
activities. Research and development costs approximated $446,000 and $29,000 in
fiscal 1997 and 1996, respectively. The research and development activity in
fiscal 1997 was incurred in connection with X-Ceed's Maestro software. Maestro
is a proprietary productivity enhancing system utilized for managing training,
sales tracking and reporting, awards and recognition programs, and product
information for sales forces.
Other income approximated $260,000 and $453,000 for fiscal 1997 and
1996, respectively. The decrease reflects a loss on sales of investments
($20,000) in fiscal 1997 as compared to a gain ($599,000) in fiscal 1996, and
costs and expenses of $253,000 incurred in connection with the acquisition of
Journeycraft and TheraCom.
Net income in fiscal 1997 approximated $1,877,000, compared to $632,000
in fiscal 1996, representing an increase of 196%. The increase reflects the 15%
increase in sales and the stability of selling, general and administrative
costs.
Liquidity and Capital Resources
At August 31, 1997, the Company had working capital of approximately
$10,042,000 as compared to approximately $7,964,000 at August 31, 1996. The
increase is primarily attributable to fiscal 1997's net income. Subsequent to
year end, the Company entered into an amended credit facility with its lead
bank. The amended agreement provides for a $600,000 term loan bearing interest
at 1/2% over the bank's prime rate and a line of credit facility of $2,500,000
bearing interest at the bank's prime rate. In addition, the amended agreement
provides for a foreign exchange line in the amount of $2,000,000 which may be
used to hedge against fluctuations in foreign currency. The amended credit
facility expires in December 1998 and supersedes any prior credit facility. The
amended credit facility contains various covenants pertaining to the maintenance
of certain financial ratio restrictions. At August 31, 1997, the Company had a
loan balance in a long-term loan of $74,700 payable through October 2000.
In October 1997 the Company extended the expiration date of its Class A
and B Warrants from October 30, 1997 to April 30, 1998. All other terms and
conditions of the Company's Warrants remained unchanged.
The consolidated statement of cash flows for fiscal 1997 reflects net
cash provided by operating activities of $1,161,998. This resulted principally
from the Company's net income of $1,876,620. Net cash used in investing
activities was $126,000, consisting of acquisition of property and equipment of
$150,000, an increase in notes receivable of $100,000, offset by proceeds from
the sale of marketable securities of $138,000. Net cash used in financing
activities approximated $1,139,000, consisting principally of the repayment of
notes payable for $1,065,000.
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The Company believes that it has adequate working capital for at least
the next twelve months of operations. As of August 31, 1997 the Company had
approximately $7,230,300 in cash and cash equivalents. While the Company has
sufficient capital resources to conduct its current activities, it will require
additional financing in order to expand its current operations. In order to
obtain such financing, the Company might seek to encourage the exercise of its
redeemable publicly traded Warrants or make a private placement of its
securities. The Company has at present no plans or arrangements to raise
additional capital by either method.
Item 7. Financial Statements
The financial statements commence on Page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The executive officers and directors of the Company are as follows:
Name Age Position
- ------------------- ----- -------------
Werner Haase............... 60 Chairman and CEO
Nurit Kahane Haase......... 47 Senior Vice President
Norman Doctoroff........... 64 Director
John Bermingham............ 58 Director
Directors are elected to serve until the next annual meeting of
shareholders of the Company or until their successors are elected and qualified.
The Board of Directors held five (5) meetings in the fiscal year ended August
31, 1997 and also met informally and acted by written consents during the year.
Officers serve at the discretion of the Board of Directors subject to any
contracts of employment.
Werner Haase has served as a Director of the Company since September
1987 and became Chairman and Chief Executive Officer in July 1996 following the
acquisition of Journeycraft and TheraCom. For more than the past five years, Mr.
Haase has been a Director and chief Executive Officer of Journeycraft. Mr. Haase
is also a director of Puretec Corporation, a company which manufactures
specialty plastic products and is engaged in the recycling of post consumer
plastics and plastic injection molding.
14
<PAGE>
Nurit Kahane Haase became Senior Vice President of the Company in July
1996 following the acquisition of Journeycraft and TheraCom. For more than the
past five years, Mrs. Haase has been President of Journeycraft.
Norman Doctoroff was elected a director of the Company in May 1996.
Until 1995, he was President of Gemini Industries, a company engaged in the
production of consumer electronics accessories. Since then he has served as an
independent management consultant to Gemini Industries and other companies.
John Bermingham was elected on November 13, 1997 to serve as a director
of the Company until the next annual meeting of stockholders. Mr. Bermingham has
served as a consultant to the Company since April 1997. Mr. Bermingham formerly
served as president and chief executive officer of Rolodex Corporation during
1996 and through April 1997. From 1993 to 1996 Mr. Bermingham was employed by
AT&T. He held the position of president and chief executive officer of AT&T
Smart Cards Systems and Solutions, a division of AT&T. From 1982 through 1993,
Mr. Bermingham held various senior executive officer positions with Sony
Corporation of America.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the fiscal year ended August 31, 1997 all Section 16(a)
filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with.
Item 10. Executive Compensation
The following table sets forth information with respect to compensation
paid by the Company for the services to the Company during the three years ended
August 31, 1997 by the Company's Chief Executive Officer and three officers with
compensation in excess of $100,000.
15
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Re- All
Annual stricted Securities Other
Compen- Stock Underlying LTIP Compen-
Name and sation Awarded Options/ Payouts sation
Principal Position Year Salary($) Bonus($) ($) ($) SARs(#) $ $
- ------------------ ---- ---------- -------- --------- ---------- ---------- ------- -------
Werner Haase (1)(2)(3) 1997 $500,000 $300,000 $ 82,152 0 0 $ 0 $ 0
Chairman and CEO 1996 $ 10,500 $ 22,250 $ 0 0 0 $ 0 $ 0
1995
Nurit Haase (1) 1997 $250,000 $ 0 $ 0 0 0 $ 0 $ 0
Sr. Vice President 1996 $ 10,500 $ 63,900 $ 0 0 0 $ 0 $ 0
1995
Yitz Grossman (4)(6) 1997
Former Chairman 1996 $150,000 $ 0 $ 71,000 0 100,000 $ 0 $ 0
and Secretary 1995 $139,000 $ 45,000 $ 15,000 0 100,000 $ 0 $ 0
Peter Cohen (5)(6) 1997
Former President 1996 $111,000 $ 0 $ 75,000 0 100,000 $ 0 $ 0
1995 $100,000 $ 45,000 $ 0 0 100,000 $ 0 $ 0
</TABLE>
(1) Werner Haase and Mr. Haase's wife, Nurit Kahane Haase, assumed their current
positions with the Company on July 2, 1996 following the acquisition of
Journeycraft and TheraCom. Information is given only for periods subsequent to
July 2, 1996.
(2) On November 13, 1997, the Board of Directors, Mr. Haase abstaining, awarded
a bonus of $300,000 to Mr. Haase based on the Company's performance for fiscal
1997.
(3) Represents premiums for life insurance policies paid by the Company on
behalf of Mr. Haase.
(4) Mr. Grossman resigned from his positions with the Company effective December
12, 1996.
(5) Mr. Cohen resigned as President, Chief Executive Officer and Treasurer of
the Company effective July 2, 1996. He continues to serve as Managing Director
of the first aid division, which is not an executive officer position.
(6) During fiscal 1996, the Company transferred certain life insurance policies
to Messrs. Grossman and Cohen which are included in "Other Annual Compensation."
The aggregate amount of personal benefits cannot be specifically or
precisely ascertained and do not, in any event, exceed $50,000 or 10% of
compensation as to any person. The Company offers health insurance to all of its
employees. At present time the Company does not have any retirement, pension,
profit sharing, or other similar programs or benefits for its executive
officers.
The Company has not paid remuneration of any nature for or on account
of services rendered by a director in such capacity.
16
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Percent of
Number of Total Options/
Securities SARs Granted
Underlying to Employees Exercise or
Options/SARs in Fiscal Base Price
Name Granted (#) Year ($/Sh) Expiration Date
(a) (b) (c) (d) (e)
-0- -0- -0-
No options were granted to anyone during fiscal 1997.
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-ENDED OPTION/SAR VALUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-end
(#) ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
--------- --------------- ------------------ ------------- -------------
WERNER HAASE, Chairman and CEO -0- -0- 243,750 $354,680
</TABLE>
All of the foregoing options are exercisable: 143,750 at an exercise price of
$1.52 and 100,000 at an exercise price of $2.19.
Employment Agreements
In July 1996, the Company entered into a five-year employment agreement
with Nurit Kahane Haase effective as of July 1, 1996. The agreement provides for
annual compensation of $250,000 per year. In the event of a change in control of
the Company, Mrs. Haase is entitled to receive a one-time payment equal to three
times her then current annual compensation. A change of control includes the
acquisition of over 30% of the Company's stock, the sale or transfer of over 50%
of the Company's assets, or certain mergers or other combinations.
In December 1996, the Company entered into a five-year employment
agreement with Werner Haase effective as of January 1, 1997. The agreement
provides for annual compensation of $500,000 per year as well as the maintenance
of various insurance policies. In the event of a change in control of the
Company, Mr. Haase is entitled to receive a one-time payment equal to three
times his then current annual compensation. A change of control includes the
acquisition of over 30% of the Company's stock, the sale or transfer of over 50%
of the Company's assets, or certain mergers or other combinations. Mr. Haase's
agreement also entitles him to receive bonuses at the discretion of the Board of
Directors.
17
<PAGE>
Stock Option Plans
The Company has adopted three stock option plans. The Non-Qualified
Stock Option Plan ( the "NQSO Plan") which expired on April 6, 1994 covering
187,500 shares of the Company's Common Stock, $.08 par value, pursuant to which
officers and employees of the Company were eligible to receive non-qualified
stock options. As of November 15, 1997, options to acquire 128,125 shares have
been granted under the NQSO Plan at exercise prices of $1.52 per share. All
options granted under the NQSO Plan have been at exercise prices at least equal
to the fair market value of the Common Stock on the date of grant.
Under the 1990 Stock Option Plan (the "1990 Plan") the Company may
grant to its officers, key employees and others who render services to the
Company, options to purchase up to 187,500 shares of the Company's Common Stock
at a price which may not be less than the fair market value per share in the
case of incentive stock options or 85% of fair market value in the case
non-qualified options for such stock in the date of the granting of the Option.
As of November 15, 1997, options to acquire a total of 170,000 shares have been
granted under the 1990 Plan at exercise prices ranging from $1.52 to $2.00 per
share.
The 1995 Stock Option Plan (the "1995 Plan") operates on substantially
the same terms as the 1990 Plan except that it includes option to purchase up to
500,000 shares of the Company's Common Stock. Any options granted under the plan
expire ten years from the date of grant. The plan expires March 1, 2005. As of
November 15, 1997 all available options had been granted under the 1995 Plan and
options to acquire a total of 467,000 shares remain outstanding at an exercise
price of $2.19 per share.
Item 11. Security Ownership of certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of November 1997 by: (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (ii) each of the Company's officers and
directors; and (iii) all officers and directors of the Company as a group:
Amount and Nature of
Name and Address Beneficial Ownership Percentage
Werner G. Haase (1) 2,525,625 34.7%
488 Madison Avenue
New York, NY
Nurit Kahane Haase (1) 2,525,625 34.7%
488 Madison Avenue
New York, NY
18
<PAGE>
J. Morton Davis (2) 543,389 7.7%
44 Wall Street
New York, NY
William Walters 500,000 7.0%
650 Fifth Avenue
New York, NY
Seneca Associates 400,000 5.7%
56 Rechov Rochild
Bat Yam, Israel
Yitz Grossman (3) 600,250 8.2%
40 Fulton Street
New York, NY
Norman Doctoroff (4) 25,000 0.5%
81 Two Bridges Road
Fairfield, NJ
All officers and
directors as a group
(3 persons) 2,560,625 35.0%
(1) Consists of 1,131,875 shares of Common Stock owned by Mr. Haase, options to
acquire 243,750 shares held by Mr. Haase, 1,112,000 shares owned by Mrs. Haase,
and 37,500 shares held jointly by Mr. and Mrs. Haase.
(2) Consists of 161,454 redeemable Class A Common Stock Purchase Warrants
("Class A Warrants") and an option to purchase 81.6 Units owned by D.H. Blair
Investment Banking Corporation ("Blair"), of which Mr. Davis is Chairman and
sole stockholder. Each Unit entitles the holder to acquire 1,666 shares of
Common Stock and 1,666 Class A Warrants. Each Class A Warrant entitles the
holder to purchase one share of Common Stock and to receive one redeemable Class
B Common Stock Purchase Warrant ("Class B Warrants") at an exercise price of
$3.00 per share exercisable prior to April 30, 1998. Each Class B Warrant
entitles the holder to purchase one share of Common Stock at $6.00 per share
prior to October 30, 1997.
(3) Includes shares issuable on exercise of options to purchase 300,000 shares
of Common Stock.
(4) Represents shares issuable on exercise of options to purchase 25,000 shares
of Common Stock.
19
<PAGE>
Item 12. Certain Relationships and Related Transactions
In July 1996, the Company entered into a four-year consulting agreement
with Target Capital Corp. and Yitz Grossman, which went into effect on September
1, 1996 and terminates on May 16, 2000. Mr. Grossman was Chairman and Secretary
of the Company at the time the agreement was entered into. Mr. Grossman resigned
as an officer and director of the Company in December 1996. The agreement
provides for annual compensation of $150,000 per year and an annual bonus of
$30,000. Mr. Grossman is not required to devote his full time to the Company. In
the event of a change of control of the Company, the agreement provides for a
one-time payment equal to three times the then current annual compensation. A
change of control includes the acquisition of over 30% of the Company's stock,
the sale or transfers of over 50% of the Company's assets, or certain mergers or
other combinations.
During fiscal 1997, the Company sold 50,000 shares of Mark Solutions,
Inc. ("MSI") and received net proceeds of approximately $100,000. Subsequent to
fiscal 1997, the Company sold the remaining balance of 195,000 shares of common
stock and received net proceeds of approximately $740,500. Mr. Grossman, who was
a director and officer of the Company, was also a director of MSI at the time
these investments were made.
In September 1996, the Company loaned $100,000 to Multimedia Tutorial
Services, Inc, a publicly traded company of which Mr. Haase was a director at
that time but has subsequently resigned. This loan was evidenced by a note
bearing interest at 8% per annum, originally payable within 180 days of the date
of loan or earlier if additional funding was raised. In consideration for the
loan, the Company received warrants to purchase a minimum of 200,000 shares of
common stock of the borrower. In May 1997, the Company extended the maturity
date of the loan until September 30, 1997. In July 1997, the Company through a
limited offer converted its 200,000 warrants into 150,000 shares of common
stock. As of November 30, 1997 the loan remains unpaid and the Company is
pursuing collection. However, as a result of the deteriorating financial
condition of the borrower, the Company wrote off the receivable at August 31,
1997.
PART IV
Item 13. Exhibits, List and Reports on Form 8-K
(a) 1. Financial Statements and Schedules
The financial statements and schedules appearing
beginning on the following page are filed as part of
this annual report.
2. Exhibits
The exhibits listed on the Index to Exhibits
following the Signature Page herein are filed as part
of this annual report by incorporation by reference
from the filings indicated in the footnotes to the
Index.
20
<PAGE>
(b) On July 12, 1996, the Company filed a report on form 8-K reporting
the acquisition of Journeycraft and TheraCom. The report included Item 1 --
Changes in Control of Registrant, Item 2 -- Acquisition or Disposition of
Assets, and Item 7 -- Financial Statements and Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WATER-JEL TECHNOLOGIES, INC.
By /s/ Werner G. Haase
Werner G. Haase
Chairman and Chief Executive Officer
Dated: December 10, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on December 10, 1997 by the following persons
on behalf of Registrant and in the capacities indicated.
/s/ Werner G. Haase
Werner G. Haase,
Chief Executive Officer, Principal
/s/ Norman Doctoroff
Norman Doctoroff, Director
/s/ John Bermingham
John Bermingham, Director
21
<PAGE>
Exhibits
(3) (a) Articles of Incorporation (1), previous Amendments (3) (6) (7)
(3) (b) By-laws of the Registrant(1)
(4) (a) Form of Common Stock(1)
(4) (b) Form of Class A Warrant(2)
(4) (c) Form of Warrant Agreement
(10)(a) Employment Agreement with Peter Cohen(5)
(10)(b) Assignments of Patent Rights(3)
(10)(c) Agreement dated July 13, 1988 between Trilling Medical Technologies,
Inc., Yitz Grossman, Emanuel Trilling and Cary Trilling(4)
(10)(d) Copy of Non-Qualified Stock Option Plan(1)
(10)(e) Copy of 1990 Stock Option Plan(5)
(10)(f) Copy of 1995 Stock Option Plan(8)
(10)(g) Agreement and Plan of Merger dated as of May 17, 1996, by and among the
Company, JCI, THI, JCI Acquisition Corp., THI Acquisition Corp. and
Werner Haase(9)
(10)(h) Employment Agreement, dated as of July 1, 1996, by and among the Company
and Nurit Kahane Haase(9)
(10)(i) Employment Agreement, dated as of December 11, 1996, by and among the
Company and Werner Haase
(27) Financial Data Schedule*
- -----------------------------
* Filed herewith
(1) Incorporated by reference from the Company's Registration Statement
on Form S-18, File No. 2-90512-NY, initially filed with the Commission on April
12, 1984.
(2) Incorporated by reference from the Company's Registration Statement
on Form S-1, File No. 33-23910, initially filed with the Commission on August
23, 1988.
(3) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1987.
(4) Incorporated by reference from the Company's Current Report on Form
8-K filed with the Commission on July 22, 1988.
(5) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1990.
(6) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1991.
(7) Incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement
on form S-8, File No. 333-01685, filed with the Commission on March 13, 1996.
(9) Incorporated by reference from the Company's Current Report on Form
8-K filed with the Commission on July 12, 1996.
22
<PAGE>
WATER-JEL TECHNOLOGIES, INC.
AND SUBSIDIARIES
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED AUGUST 31, 1997
<PAGE>
WATER-JEL TECHNOLOGIES, INC. AND SUBSIDIARIES
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED AUGUST 31, 1997
CONTENTS
Page
Independent auditors' report F-1
Consolidated balance sheet F-2
Consolidated statements of income F-3
Consolidated statement of stockholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6 - F-18
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Water-Jel Technologies, Inc.
Carlstadt, New Jersey
We have audited the accompanying consolidated balance sheet of Water-Jel
Technologies, Inc. and Subsidiaries as of August 31, 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for the
two years ended August 31, 1997. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Water-Jel Technologies, Inc. and Subsidiaries as of August 31, 1997, and the
results of their operations and their cash flows for the two years ended August
31, 1997, in conformity with generally accepted accounting principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
November 14, 1997
F-1
<PAGE>
WATER-JEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,230,314
Investment in marketable securities (Note 5) 758,373
Accounts receivable, net of allowance for
doubtful accounts of $154,000 (Note 9) 3,713,709
Program costs and earnings in excess of customer billings 2,039,682
Inventories (Notes 4 and 9) 1,364,510
Prepaid expenses and other current assets 334,589
--------------
Total current assets 15,441,177
PROPERTY AND EQUIPMENT, net (Note 6) 1,354,070
INVESTMENTS IN X-CEED MOTIVATION ATLANTA, INC. (Note 7) 355,394
DUE FROM OFFICER (Note 8) 1,222,483
DEFERRED INCOME TAXES (Note 10) 231,000
OTHER ASSETS 195,956
--------------
$ 18,800,080
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,041,907
Current portion of long-term debt (Note 9) 39,200
Income taxes payable, current (Note 10) 358,933
Customer billings in excess of program costs and earnings 914,561
Deferred income tax liability (Note 10) 44,500
--------------
Total current liabilities 5,399,101
LONG-TERM DEBT (Note 9) 51,500
--------------
ACCRUED LEASE OBLIGATION (Note 15) 816,000
--------------
COMMITMENTS (Note 15)
STOCKHOLDERS' EQUITY (Note 11):
Common stock, $.08 par value; authorized 12,500,000
shares; 7,043,180 issued and outstanding 563,456
Preferred stock, $.08 par value; authorized 125,000
shares; -0- issued and outstanding -
Net unrealized gain on marketable securities 216,175
Additional paid-in capital 9,717,568
Retained earnings 2,091,910
--------------
12,589,109
Treasury stock, 10,000 shares (55,630)
--------------
12,533,479
$ 18,800,080
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
WATER-JEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Years Ended
August 31,
1997 1996
REVENUES, net (Notes 13 and 16) $ 62,885,464 $ 54,863,574
-------------- --------------
COSTS AND EXPENSES (Notes 15 and 17) :
Cost of revenues 40,094,838 34,932,523
Selling, general and administrative 18,420,233 18,682,728
Research and development 446,187 29,279
-------------- --------------
58,961,258 53,644,530
-------------- --------------
OPERATING INCOME 3,924,206 1,219,044
-------------- --------------
OTHER INCOME (EXPENSE):
Interest and dividend income 450,725 298,986
Interest expense (81,020) (126,478)
(Loss) gain on sale of investments (19,938) 598,589
Equity earnings on investments 8,510 203,463
Merger costs and expenses (Note 3) - (253,251)
Loss on impairment of notes receivable (Note 12) (100,000) (325,000)
Other, net 2,137 56,962
-------------- --------------
260,414 453,271
-------------- --------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 4,184,620 1,672,315
PROVISION FOR INCOME TAXES (Note 10) 2,308,000 922,000
-------------- --------------
INCOME BEFORE MINORITY INTEREST 1,876,620 750,315
MINORITY INTEREST IN INCOME - 118,000
-------------- --------------
NET INCOME $ 1,876,620 $ 632,315
============== ==============
NET INCOME PER COMMON SHARE (Note 11):
Primary $.26 $.09
==== ====
Assuming full dilution $.24 $.09
==== ====
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Primary 7,332,468 6,992,347
========= =========
Assuming full dilution 7,677,070 6,992,347
========= =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
WATER-JEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Note 12)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stock
12,500,000 Shares 125,000 Shares Net
$.08 Par Value $.08 Par Value Unrealized
----------------- -------------- Additional Gain on Retained
Par Par Paid-in Marketable Earnings/ Treasury
Shares Value Shares Value Capital Securities (Deficit) Stock Total
Balance, August 31, 1995 6,824,180 $545,934 - $ - $9,664,472 $ 547,955 $ (417,025) $ (55,630) $10,285,706
Transfer of shares in subsidiary
to minority shareholder - - - - (122,852) - - - (122,852)
Issuance of stock by subsidiary
for services - - - - 103,000 - - - 103,000
Exercise of options/rights 196,000 15,680 - - 26,960 - - - 42,640
Marketable securities valuation
adjustment (Note 5) - - - - - (240,507) - - (240,507)
Net income - - - - - - 632,315 - 632,315
---------- ------- ----- ----- ---------- ---------- ---------- -------- -----------
Balance, August 31, 1996 7,020,180 561,614 - - 9,671,580 307,448 215,290 (55,630) 10,700,302
Exercise of options/rights 23,000 1,842 - - 45,988 - - - 47,830
Marketable securities valuation
adjustment (Note 5) - - - - - (91,273) - - (91,273)
Net income - - - - - - 1,876,620 - 1,876,620
--------- -------- ----- ----- ---------- --------- ---------- --------- -----------
Balance, August 31, 1997 7,043,180 $563,456 - $ - $9,717,568 $ 216,175 $2,091,910 $(55,630) $12,533,479
========== ======== ===== ===== ========== ========== ========== ========= ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
WATER-JEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C>
Years Ended
August 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,876,620 $ 632,315
------------- -------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss (gain) on sale of marketable securities 19,938 (598,589)
Gain on sale of equipment - (3,500)
Loss on impairment of notes receivable 100,000 325,000
Provision for losses on accounts receivable 26,905 312,135
Minority interest in net earnings - 118,000
Contributed services - 45,000
Depreciation and amortization 460,613 539,551
Equity earnings on investment (8,510) (203,463)
Deferred income taxes 450,500 543,170
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 574,672 (2,663,264)
Inventories (261,769) 10,628
Program costs and earnings in excess of billings (1,774,534) 67,905
Prepaid expenses and other current assets (52,971) (134,052)
Other assets 41,418 147,377
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 770,848 1,350,096
Income taxes payable 138,745 (600,040)
Customer billings in excess of program costs (1,207,535) 1,402,909
Accrued lease liability 22,000 (126,000)
Other current liabilities (14,942) (19,506)
------------- -------------
Total adjustments (714,622) 513,357
------------- -------------
Net cash provided by operating activities 1,161,998 1,145,672
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in marketable securities (26,775) (70,940)
Divestiture of consolidated affiliate - (3,128,182)
Proceeds from sale of marketable securities 137,821 749,340
Repayments from shareholders - 75,000
(Increase) decrease in notes receivable (100,000) 150,000
Proceeds from sale of property and equipment 13,053 15,000
Acquisition of property and equipment (149,845) (237,274)
------------- -------------
Net cash used in investing activities (125,746) (2,447,056)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (39,200) (39,200)
Repayment of notes payable (1,065,000) -
Proceeds from notes payable - 1,065,000
Advances (to) from affiliate (82,736) 89,493
Proceeds from the exercise of warrants and options 47,830 42,640
------------- -------------
Net cash (used in) provided by financing activities (1,139,106) 1,157,933
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (102,854) (143,451)
CASH AND CASH EQUIVALENTS, beginning of year 7,333,168 7,476,619
------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 7,230,314 $ 7,333,168
============= =============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
WATER-JEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED AUGUST 31, 1997
1. Organization and Nature of Operations:
Water-Jel Technologies, Inc. (the "Company") began operations in
September 1979 as a manufacturer of emergency first aid fire blankets for burns.
The Company later expanded its manufacturing operations to include a line of
burn dressings, topical creams and generic creams and ointments.
On July 2, 1996, the Company acquired Journeycraft, Inc. and Affiliates
("Journeycraft") which significantly expanded the scope of the Company's
operations. Journeycraft's primary business is to provide solutions to critical
business issues of corporate customers through the development and application
of performance improvement programs. In addition, Journeycraft provides travel
management services, including reservations and ticketing, to major U.S.
corporations and also designs and implements training and communication programs
in the health care field as well as producing and marketing products for patient
education.
2. Summary of Significant Accounting Policies:
a. Principles of consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries.
Upon consolidation, all significant intercompany accounts and transactions are
eliminated.
Investments in affiliates, representing 20% to 50% of the ownership of
such companies, are accounted for under the equity method. Under this
accounting, the investment is increased or decreased by the Company's share of
earnings or losses after dividends.
On April 1, 1996, the Company's equity interest in X-Ceed Atlanta,
previously represented a 59% majority interest, was reduced to a 50% ownership,
as a result of the Company transferring shares of its common stock in X-Ceed
Atlanta to the minority shareholder. As a result of this stock transfer the
Company's ownership in X-Ceed Atlanta was reduced to a 50% interest and
therefore, the assets, liabilities and operations of X-Ceed Atlanta after April
1, 1996 were not included in the consolidated financial statements for the
fiscal years ended August 31, 1997 and 1996.
b. Revenue recognition
Revenue from retail travel services is recognized upon the ticketing
of the related flights. The Company bills clients in advance for group meeting
and incentive programs and records such deposits on the balance sheet, as
customer billings in excess of program costs. The Company recognizes revenue,
and the related costs, when the travel has commenced, or when the group meeting
or incentive program is completed.
For certain long-term seminar contracts, the percentage-of-completion
method is used, whereby revenue, and related costs, are recognized as work on
the contracts progresses.
F-6
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
d. Investments in marketable securities
Equity securities having readily determinable fair values and all
investments in debt securities are classified and accounted for in three
categories. Debt securities that management has the positive intent and ability
to hold to maturity are classified as "held-to-maturity securities" and reported
at amortization cost. Debt and equity securities that are bought and principally
held for the purpose of selling them in the near term are classified as "trading
securities" and reported at fair value, with unrealized gains and losses
included in operating results. Debt and equity securities not classified as
either held-to-maturity securities or trading securities are classified as
"available-for-sale securities" and reported at fair value, with the unrealized
gains and losses excluded from operating results and reported as a separate
component of stockholders' equity. A decline in the market value of any
available-for sale security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security.
Gains and losses on the sale of securities available-for-sale are
computed on the basis of specific identification of the adjusted cost of each
security.
e. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease, whichever
is shorter. Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale or
other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is included in
operations.
f. Concentration of risk
The Company invests its excess cash in deposits and money market
accounts with major financial institutions and in commercial paper of companies
with strong credit ratings. Generally, the investments mature within ninety days
and therefore, are subject to little risk. The Company has not experienced
losses related to these investments.
The concentration of credit risk in the Company's accounts receivable
is substantially mitigated by the Company's credit evaluation process,
reasonably short collection terms and the geographical dispersion of revenue.
Although the Company generally does not require collateral, reserves for
potential credit losses are maintained and such losses have been within
management's expectations.
A significant portion of revenue earned by the Company's retail
corporate travel business segment is derived from commissions earned on airline
bookings with major U.S.
and foreign airline carriers.
g. Income taxes
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-7
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
h. Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," an impairment loss is recognized whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
i. Stock-based compensation
The Company applies APB Opinion No. 25 and related interpretations in accounting
for stock-based compensation to employees. Stock compensation to non-employees
is accounted for at fair value in accordance with Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation."
j. Research and development costs
Research and development costs, consisting of salaries and materials
related to software development, are expensed as incurred.
k. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
l. Advertising costs
Advertising costs are charged to operations when the advertising
first takes place.
m. Statement of cash flows
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
n. Reclassifications
Certain reclassifications have been made to the financial statements
for the year ended August 31, 1996 to conform with the classifications used in
1997.
3. Merger With Journeycraft, Inc. and Affiliates:
On July 2, 1996, Journeycraft became a wholly-owned subsidiary of the
Company through the exchange of 3,500,000 shares of the Company's common stock
for all of the outstanding stock of Journeycraft. The merger qualified as a
tax-free reorganization and was accounted for as a "pooling of interests." The
accompanying financial statements for fiscal 1996 are based on the assumption
that the companies were combined for the full year.
Merger costs of $253,000 were incurred and have been charged to
operations in the fourth quarter of 1996. The merger costs consist of legal,
accounting and investment banking fees.
F-8
<PAGE>
4. Inventories:
Inventories consists of the following at August 31, 1997:
Raw materials $ 401,534
Finished goods 962,976
-------------
$ 1,364,510
5. Investment in Marketable Securities:
At August 31, 1997, marketable equity securities, which are classified as
available-for-sale securities, are valued at the fair value of the securities
and the unrealized gain on the securities, net of income taxes, are reflected in
stockholders' equity. During the years ended August 31, 1997 and 1996, the net
change in the valuation adjustment on marketable securities classified as
available-for-sale amounted to $(91,273) and $(240,507), respectively.
The carrying amounts of investment securities as shown in the balance
sheet of the Company and their approximate values at August 31, 1997 were as
follows:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
Securities available-for-sale
equity investments $422,292 $347,288 $(11,207) $758,373
======== ======== ========== ========
6. Property and Equipment:
Property and equipment, at cost, consists of the following at August 31,
1997:
Machinery and equipment $ 2,120,014
Furniture and fixtures 522,285
Software 152,426
Transportation equipment 56,251
Leasehold improvements 915,708
3,766,684
Less accumulated depreciation and amortization 2,412,614
$ 1,354,070
7. Investment in X-Ceed Motivation Atlanta, Inc.:
The Company has a 50% equity interest in X-Ceed Atlanta which organizes
and operates group incentive programs for major corporations located primarily
in the Atlanta, Georgia area. For the years ended August 31, 1997 and 1996
earnings from this investment approximated $8,000 and $203,000, respectively.
Summarized financial position and results of operations of X-Ceed Atlanta
are presented below.
August 31,
Assets 1997
Current assets $1,945,000
Property and equipment, net 40,000
Other assets 136,000
----------
Total assets $2,121,000
=============
F-9
<PAGE>
7. Investment in X-Ceed Motivation Atlanta, Inc.: (Cont'd)
Liabilities and Shareholders' Equity
Current liabilities $ 858,000
Shareholders' equity 1,263,000
----------
Total liabilities and shareholders' equity $2,121,000
==========
Period
Year Ended April 1, 1996
August 31, to August 31,
1997 1996
----------- --------------
Revenues, net $2,532,000 $9,017,000
Operating expenses 2,655,000 8,367,000
----------- -------------
Operating (loss) income (123,000) 650,000
Other income 79,000 32,000
----------- -------------
(Loss) income before (benefit)
provision for income taxes (44,000) 682,000
(Benefit) provision for
income taxes (60,000) 275,000
------------- -------------
Net income $ 16,000 $ 407,000
============= =============
Loans of $276,000 from X-Ceed Atlanta to the Company are netted against
the investment in X-Ceed Atlanta as of August 31, 1997.
8. Due from Officer:
Due from officer represents a loan to the Company's President. The loan
is payable in annual installments of $100,000 commencing in December 1997. These
annual payments shall be first applied to accrued interest, with the balance
applied to reduce the principal. The remaining unpaid principal and any accrued
interest is payable in full in December 2016. Commencing December 1, 1996, the
loan bears interest at 7.0% per annum, prior to that the loan was non-interest
bearing.
9. Long-Term Debt:
Long-term debt at August 31, 1997, consists of the following:
Term loan payable in monthly installments of
$2,767 plus interest through October 2000.(a) $ 74,700
Term loan payable in monthly installments of $500
plus interest at 9 1/2% through April 2000. 16,000
---------
90,700
Less current portion 39,200
---------
$ 51,500
(a) The Company has available a $250,000 term loan facility of which
$175,000 remains available at August 31, 1997. Borrowings bear interest at 1
1/4% over the bank's prime rate (8.5% at August 31, 1997).
In addition, the Company maintains a line of credit with a bank. The line
of credit bears interest at 3/4% over the bank's prime rate and has a maximum
borrowing limit of $750,000. The line is secured by accounts receivable and
inventory of the Company. At August 31, 1997, there was no balance outstanding.
F-10
<PAGE>
9. Long-Term Debt: (Cont'd)
In November 1997, the Company entered into an amended credit facility
(the "amended facility") with its bank. Under the amended agreement, the term
loan provides for a $600,00 term loan bearing interest at 1/2% above the bank's
prime rate, and a line of credit facility of $2,500,000 bearing interest at the
bank's prime rate. In addition, the amended agreement provides for a foreign
exchange line, to hedge against fluctuations in foreign countries, in the amount
of $2,000,000. The amended facility contains various covenants pertaining to the
maintenance of certain financial ratio restrictions and expires in December
1998.
Annual maturities of long-term debt are as follows:
Year Ending
August 31,
1998 $ 39,200
1999 39,200
2000 12,300
---------
$ 90,700
10. Income Taxes:
The provision (benefit) for income taxes is comprised of the following:
Years Ended
August 31,
1997 1996
Current:
Federal $ 1,199,900 $ 46,360
States 657,600 332,470
------------- -----------
1,857,500 378,830
------------- -----------
Deferred:
Federal 394,500 413,570
States 56,000 129,600
------------- -----------
450,500 543,170
------------- -----------
$ 2,308,000 $ 922,000
============= ===========
The Company's provisions for income taxes reflects benefits from the
utilization of net operating loss carryforwards of approximately $386,000 and
$802,000 for the years ended August 31, 1997 and 1996, respectively.
The net deferred tax amounts included in the financial statements consist
of the following:
Deferred tax assets:
Depreciation $107,000
Accrued expenses 42,000
Accrued lease obligation 343,000
Allowance for bad debts 63,000
Amortization 38,000
Other 63,000
---------
656,000
Deferred tax liabilities:
Unrealized gain on marketable securities (120,000)
Investment in subsidiary (265,000)
Deferred commissions (84,500)
----------
(469,500)
Net deferred income taxes $ 186,500
==========
F-11
<PAGE>
10. Income Taxes: (Cont'd)
The Company's effective tax rate for the years ended 1997 and 1996 on
earnings differs from the Federal Statutory regular tax rate as follows:
Years Ended
August 31,
1997 1996
Federal statutory rate 34.0% 34.0%
State taxes, net of federal benefit 15.0 15.0
Adjustment of prior years' accrual 6.0 17.3
Reduction of valuation allowance - (17.9)
Federal income tax credits (1.5) (3.0)
Permanent differences 1.7 12.1
Other - (2.4)
55.2% 55.1%
====== =====
11. Stockholders' Equity:
a. Stock options/warrants
(i) The Company had a non-qualified stock option plan which was
terminated in 1994. The Plan provided for the granting of options to purchase
not more than 187,500 shares of common stock to employees of the Company,
including directors.
The following table summarizes the status of stock options
outstanding under the plan:
Number of Option
Shares Prices
Outstanding, August 31, 1995 140,625 $1.52 - $2.32
Granted - -
Canceled and expired - -
----------
Outstanding, August 31, 1996 140,625 $1.52 - $2.32
Granted - -
Canceled and expired (12,500) 2.32
----------
Outstanding, August 31, 1997 128,125 $1.52
==========
(ii) During 1990, the Company adopted an incentive stock option plan
(the "1990 Plan") which provides for the granting of options to employees,
officers, directors, and others who render services to the Company. Under the
terms of the Plan, options to purchase not more than 187,500 shares of common
stock may be granted, at a price which may not be less than the fair market
value per share in the case of incentive stock options or 85% of fair market
value for non-qualified options. The options expire up to ten years from the
date of grant.
F-12
<PAGE>
11. Stockholders' Equity: (Cont'd)
a. Stock options/warrants (Cont'd)
The following table summarizes the status of stock options
outstanding under the Company's 1990 plan:
Number of Option
Shares Prices
Outstanding, August 31, 1995 187,500 $1.52
Granted - -
Exercised (5,000) $1.52
Canceled and expired (40,000) $1.50
----------
Outstanding, August 31, 1996 142,500 $1.52
Granted 32,500 $2.00
Exercised (5,000) $1.52
Canceled and expired - -
----------
Outstanding, August 31, 1996 170,000 $1.52 - $2.00
==========
(iii) During 1995, the Company adopted an incentive stock option plan
(the "1995 Plan") which provides for the granting of option to employees,
officers, directors, and others who render services to the Company. Under the
terms of the plan, options to purchase not more than 500,000 shares of common
stock may be granted, at a price which may not be less than the fair market
value per share in the case of incentive stock options or 85% of fair market
value for non-qualified options. Any options granted under the plan expires ten
years from the date of grant. The plan expires March 1, 2005.
The following table summarizes the status of stock options
outstanding under the Company's 1995 plan:
Number of Option
Shares Prices
Outstanding, August 31, 1995 - $ -
Granted 500,000 $2.19
Canceled and expired (16,000) $2.19
----------
Outstanding, August 31, 1996 484,000 $2.19
Granted - -
Exercised (17,000) $2.19
----------
Outstanding, August 31, 1997 467,000 $2.19
==========
The Company has elected the disclosure-only provisions of
Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation ("FASB 123") in accounting for its employee stock options.
Accordingly, no compensation expense has been recognized. Had the Company
recorded compensation expense for the stock options based on the fair value at
the grant date for awards in the fiscal years 1997 and 1996 consistent with the
provisions of FASB 123, the effect on the Company's net income and net income
per share would have been immaterial.
(iv) In connection with a second public offering of its securities in
November 1988, the Company issued Class A warrants. Each Class A warrant
entitles the holder to purchase one share of common stock and one Class B
warrant at an exercise price of $3.00 per share. Each Class B warrant entitles
the holder to purchase one share of common stock for an exercise price of $6.00
per share.
F-13
<PAGE>
11. Stockholders' Equity: (Cont'd)
a. Stock options/warrants (Cont'd)
On October 10, 1997, the Company extended the expiration date
of the Class A and B warrants until April 30, 1998.
In addition, the underwriter for the second offering received
an option to acquire 106 units for an exercise price of $6,500 per unit. Each
unit consist of 1,666.625 shares of common stock and an equivalent number of
Class A warrants. The terms of the Class A and B warrants are identical to the
warrants issued in the public offering.
(v) In October 1994, the Company issued options to acquire 420,000
shares of common stock to its officers, directors and certain legal counsel.
These options have been issued outside of any of the existing plans and require
restrictive legend. The exercise price of these options are $1.52 and expire in
October 2004.
The above transactions did not result in any compensation cost,
as the exercise prices either equal or exceed the fair market value of the stock
at the date of issuance.
b. Stock options/rights
In October 1993, an affiliate of Journeycraft granted a consultant an
option to acquire 175,000 shares of common stock at an aggregate exercise price
of $1. This option was exercised in January 1996.
c. Stock bonus
An employment agreement with an officer/shareholder of X-Ceed Atlanta
provided for the issuance of up to 25 shares (25%) of X-Ceed Atlanta common
stock if certain earnings levels were attained. The officer/shareholder earned 9
shares in the twelve month period ended March 31, 1996. The additional shares
earned by the officer/shareholder were transferred from the Company
stockholdings. The excess of the fair value of the shares transferred over their
book value has been recorded as an equity adjustment.
d. Common shares reserved at August 31, 1997
Incentive stock option plans 661,000
Non-qualified stock option plan 128,125
Class A Warrants 1,559,858
Class B Warrants 1,766,623
Underwriters' units 529,987
Key employees' units 420,000
----------
5,065,593
e. Net income per common share
Net income per common share has been computed by dividing net income
by the weighted average number of common stock and common stock equivalents
outstanding during each period. Common stock equivalents represents the dilutive
effect on the assumed exercise of certain outstanding options and warrants.
F-14
<PAGE>
11. Stockholders' Equity: (Cont'd)
e. Net income per common share (Cont'd)
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("Statement 128"), which simplifies the
standards for computing earnings per share previously used and makes them
comparable to international standards. The statement is effective for financial
statements issued for periods ending after December 15, 1997, and earlier
application is not permitted. Had the Company implemented the new pronouncement,
management believes that net income per common share would have increased by
$.02 for the year ended August 31, 1997.
12. Loss on Impairment of Notes Receivable:
The Company has reduced the carrying value of notes receivable to reflect
the diminution of their value caused by the financial instability of the
borrowers. The reductions resulted in a charge to operations of $100,000 and
$325,000 in the years ended August 31, 1997 and 1996, respectively. The note
reduced in 1997 was due from a company affiliated with a director/officer of the
Company.
13. Business Segments:
The Company's major operations are in Performance Improvement and Medical
Communication, Travel Management Services and First Aid Products.
The Performance Improvement division provides solutions for critical
business issues to corporate customers based on management techniques coupled
with award programs, while the Medical Communications division designs and
implements seminars for training health care professionals and produces and
markets patient education programs. The Travel Management Services segment
provides corporate travel management and consulting services. The First Aid
Products segment manufacturers and markets products which consist of a
proprietary burn care line and a line of generic creams and ointments to the
industrial marketplace and on a limited basis to consumer markets.
Revenues, operating income, capital expenditures and depreciation and
amortization pertaining to the industries in which the Company operates are
presented below.
Years Ended
August 31,
1997 1996
Revenue:
First Aid Products $ 5,296,000 $ 4,223,000
Travel Management Services 11,571,000 10,811,000
Performance Improvement and
Medical Communications 46,018,000 39,830,000
-------------- --------------
$ 62,885,000 $ 54,864,000
============== ==============
Operating (Loss) Income:
First Aid Products $ 696,000 $ (108,000)
Travel Management Services 937,000 801,000
Performance Improvement and
Medical Communications 2,291,000 526,000
-------------- --------------
$ 3,924,000 $ 1,219,000
============== ==============
F-15
<PAGE>
13. Business Segments: (Cont'd)
Capital Expenditures:
First Aid Products $ 89,000 $ 52,000
Travel Management Services 23,000 85,000
Performance Improvement and
Medical Communications 37,000 100,000
-------------- --------------
$ 149,000 $ 237,000
============== ==============
Depreciation and Amortization:
First Aid Products $ 303,000 $ 364,000
Travel Management Services 74,000 67,000
Performance Improvement and
Medical Communications 83,000 109,000
-------------- --------------
$ 460,000 $ 540,000
============== ==============
Identifiable assets pertaining to the industries as of August 31, 1997
are as follows:
First Aid Products $ 3,172,000
Travel Management Services 1,219,000
Performance Improvement and
Medical Communications 5,042,000
General corporate assets 9,367,000
$ 18,800,000
14. Fair Value of Financial Instruments:
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt, including
the current portion, was estimated using a discounted cash flow analysis,
based on the Company's assumed incremental borrowing rates for similar
types of borrowing arrangements. The carrying amount of variable and
fixed rate debt at August 31, 1997 approximates fair value.
15. Commitments and Contingencies:
a. Lease commitment
The Company conducts its operations from leased space in various
locations throughout the United States. These leases (classified as operating
leases) expire at various dates through June 2008. Management expects that in
the normal course of business these leases will be renewed or replaced by other
leases.
F-16
<PAGE>
15. Commitments and Contingencies: (Cont'd)
a. Lease commitment (Cont'd)
As of August 31, 1997, future net minimum rental payments under
operating leases having initial or remaining non-cancelable terms in excess of
one year are as follows:
Year Ending
August 31,
1998 $ 742,000
1999 625,000
2000 546,000
2001 533,000
2002 545,000
Thereafter 3,500,000
Rental expense approximated $866,000 and $956,000 for the years ended
August 31, 1997 and 1996, respectively.
The Company recognizes rent expense on its leases on a straight-line
basis. The excess of rent expense on a straight-line basis over the rental
payments made, is recorded as an accrued liability.
b. Employment agreements
The Company is party to employment and consulting agreements with
four officers/ consultants which provide for annual salaries aggregating
$1,100,000. The agreements provide for a one-time compensation payment of three
times the current annual compensation in the event of a change in corporate
control, as defined.
The aggregate minimum commitment under these agreements are as
follows:
Year Ending
August 31,
1998 $ 988,000
1999 930,000
2000 877,000
2001 750,000
2002 417,000
Thereafter 500,000
c. Retirement plan
Journeycraft maintains a retirement plan which is a salary reduction
plan under Section 401(k) of the Internal Revenue Code. Participation in the
plan is voluntary, and any participant may elect to contribute up to 15% of
their earnings. Journeycraft will match 10% of the first 6% of the employee's
contribution. Journeycraft's contribution approximated $13,600 and $22,000 for
the years ended August 31, 1997 and 1996, respectively.
d. Litigation:
The Company is involved in various lawsuits and claims incidental to
its business. In the opinion of management, the ultimate liabilities, if any,
resulting from such lawsuits and claims, will not materially affect the
financial position of the Company.
F-17
<PAGE>
16. Major Customers:
Revenues from two customers approximated 33% and 21% and 24% and 20% of
total revenues for the years ended August 31, 1997 and 1996, respectively.
17. Advertising Costs:
Included in selling, general and administrative expenses are advertising
costs of $203,000 and $284,000 for the years ended August 31, 1997 and 1996,
respectively.
18. Supplemental Disclosures of Cash Flow Information:
Years Ended
August 31,
1997 1996
Interest paid $ 81,020 $ 126,478
============= ===========
Income taxes paid $ 1,384,326 $ 583,551
============= ===========
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 7,230,314
<SECURITIES> 758,373
<RECEIVABLES> 3,867,709
<ALLOWANCES> 154,000
<INVENTORY> 1,364,510
<CURRENT-ASSETS> 15,441,177
<PP&E> 3,766,684
<DEPRECIATION> 2,412,614
<TOTAL-ASSETS> 18,800,080
<CURRENT-LIABILITIES> 5,399,101
<BONDS> 51,500
0
0
<COMMON> 563,456
<OTHER-SE> 11,970,023
<TOTAL-LIABILITY-AND-EQUITY> 18,800,080
<SALES> 62,885,464
<TOTAL-REVENUES> 62,885,464
<CGS> 40,094,838
<TOTAL-COSTS> 40,094,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,020
<INCOME-PRETAX> 4,184,620
<INCOME-TAX> 2,308,000
<INCOME-CONTINUING> 1,876,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,876,620
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.24
</TABLE>
