<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.)
Check the appropriate box:
[ ] Preliminary Proxy Statement
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by rule 14a-
6(e)(2))
Selvac Corporation
(Name of registrant as Specified in Its Charter)
Selvac Corporation
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act rules 0-11(c)(1)(ii), 14a-6(i), or Item
22(a)(2) of Schedule 14A
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies.
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fees offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
SELVAC CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on June 4, 1996
The Special Meeting of Stockholders of Selvac Corporation (the "Company") will
be held at the University Center Hotel at 1535 S.W. Archer Road, Gainesville,
Florida on Tuesday, June 4, 1996 at 11:00 a.m. for the following purposes:
1. To amend the Company's Certificate of Incorporation to change the name of
the company to "Mehl/Biophile International Corporation", such change of name
to become effective upon the closing of a proposed merger between Classy Lady
by Mehl of Puerto Rico, Inc. and a subsidiary of the Company;
2. To amend the Company's Certificate of Incorporation to authorize the
issuance of up to 60,000,000 shares of Common Stock, par value $.01 per share.
A vote to authorize the additional shares will enable the Company to
consummate the proposed merger of its wholly-owned subsidiary with Classy Lady
by Mehl of Puerto Rico, Inc. (the "Merger") and is therefore essentially a
vote with respect to the Merger; and
3. To consider and act on such other business as may properly come before the
meeting.
The record date for the Special Meeting of Stockholders is the close of
business on April 17, 1996, and only stockholders of record at said date will
be entitled to notice of and to vote at the meeting.
By order of the Board of Directors,
Paul W. Hartloff, Jr.
Secretary
May 2, 1996
It is hoped that you can personally attend this meeting but, if you cannot do
so, you are requested to mark, date, sign and return the enclosed proxy, which
requires no postage if mailed in the United States.
<PAGE> 3
PROXY STATEMENT
The following statement is submitted to stockholders in connection with the
solicitation of proxies for the Special Meeting of Stockholders of Selvac
Corporation (the "Company" or "Selvac") to be held on June 4, 1996. The
meeting will be held at 11:00 a.m. at the University Center Hotel at 1535 S.W.
Archer Road, Gainesville, Florida. A proxy for this meeting is enclosed.
This Proxy Statement and form of proxy are being sent to stockholders on or
about May 2, 1996.
The purposes of this meeting are (1) to amend the Company's Certificate of
Incorporation to change the name of the company to "Mehl/Biophile
International Corporation", such change of name to become effective upon the
closing of a proposed merger (the "Merger") between Classy Lady by Mehl of
Puerto Rico, Inc. ("Classy Lady") and a subsidiary of the Company, Selvac
Acquisition Corp. ("Acquisition"); (2) to amend the Company's Certificate of
Incorporation to authorize the issuance of up to 60,000,000 shares of Common
Stock, par value $.01 per share; and (3) to consider and act on such other
business as may properly come before the meeting. A vote to authorize the
additional shares of the Company's Common Stock will enable the Company to
consummate the Merger and is therefore essentially a vote with respect to the
Merger.
If the Merger is consummated, the stockholders of Classy Lady will own an
aggregate of 15 million shares of Company Common Stock, representing 50.9% of
the total number of outstanding shares of the Company's Common Stock. If, as
described below, an additional 10 million shares of Company Common Stock are
issued upon the achievement of certain milestones, such persons would own an
aggregate of 25 million shares, which would represent approximately 63.3% of
the Company's Common Stock. As of the date of this Proxy Statement, the first
such milestone (which triggers the issuance of an additional two million
shares) has been achieved and management of the Company believes that it is
substantially likely that the second milestone (which triggers the issuance of
an additional three million shares) will be achieved within a relatively short
time period after the Closing. Therefore, the Company is substantially likely
to issue a minimum of 20 million shares of Common Stock in connection with the
Merger.
The stockholders of the Company do not have any rights of appraisal under the
Delaware General Corporation Law with respect to items 1 and 2 to be voted on
at the Special Meeting nor with respect to the merger of Acquisition with
Classy Lady.
The enclosed proxy is solicited by and on behalf of the Board of Directors of
the Company. The Company will bear the cost of the solicitation, including
the preparation, printing and mailing of the Notice of Special Meeting of
Stockholders, Proxy Statement, form of proxy and business reply envelope. The
solicitation will be conducted principally by mail, although directors,
officers and regular employees of the Company (at no additional compensation)
may solicit proxies personally or by telephone or telegraph. Arrangements
will be made with brokerage houses and other custodians, nominees, and
fiduciaries for proxy material to be sent to their principals and the Company
will reimburse such persons for the expenses in so doing.
<PAGE> 4
A quorum of the stockholders of the Company must be present at the Special
Meeting before an effective vote can be taken on the amendments to the
Certificate of Incorporation (the "Amendments"). A quorum of stockholders of
the Company will be present at the Special Meeting if the holders of a
majority of the outstanding shares entitled to vote are present in person or
by proxy. Votes, whether in person or by proxy, will be counted and tabulated
by inspectors appointed by the Company. Abstentions will be counted as
present for purposes of determining whether a quorum is present. The votes on
the Amendments require the approval of the majority of the outstanding shares
of the Company's Common Stock, which majority vote may include the vote of
officers, directors and shareholders of the Company who may be considered
affiliates of the Company. Abstentions and broker non-votes will have the
same effect as a negative vote.
As of April 17, 1996, the Company's officers and directors owned an aggregate
of 4,213,083 shares (29.1%) of the Company's outstanding Common Stock. The
Company expects that all such shares will be voted in favor of the Amendments.
The shares represented by all valid proxies in the enclosed form will be voted
if received in time for the meeting and voted in accordance with the
specifications, if any, made on the proxy. Unless authority is withheld, the
proxies will be voted FOR the adoption of the proposals submitted for vote by
the Board of Directors. Proxy cards, unless otherwise indicated by the
stockholder, also confer on the persons named on the form of proxy
discretionary authority to vote all shares of stock represented by proxies on
any matter which properly may be presented for action at the meeting even if
not contained herein. A proxy is revocable at any time prior to being voted.
No special form of revocation is required and it need not be in writing.
The Company's mailing address is 221 Boston Post Road, Suite 310, Marlboro, MA
01752.
THE PROPOSALS
On December 18, 1995, the Company, its wholly-owned acquisition subsidiary,
Selvac Acquisition Corp., ("Acquisition"), and Classy Lady of Mehl of Puerto
Rico, Inc., a privately-held company ("Classy Lady"), signed an Agreement and
Plan of Merger which was restated and amended on February 15, 1996 (as
amended, the "Agreement") whereby Classy Lady will merge with and into
Acquisition (the "Merger"). Pursuant to the Agreement, the Company will issue
15 million additional shares of its Common Stock to the shareholders of Classy
Lady. The Agreement, which is effective as of January 1, 1996, also provides
for the issuance of up to 10 million shares of Common Stock of the Company
upon the achievement of designated milestones in connection with certain
proposed joint ventures to be undertaken by Classy Lady. The Company will be
re-named Mehl/Biophile International Corporation and Thomas L. Mehl, Sr., a
principal shareholder of Classy Lady, will be Chairman of the Board and Chief
Executive Officer. The former shareholders of Classy Lady will own in the
aggregate a majority of the Company's Common Stock and Thomas L. Mehl will
have the right to designate five of the seven directors to serve on the
Company's Board immediately after consummation of the Merger. See
"Information About the Merger."
<PAGE> 5
It is anticipated that the Merger will be consummated immediately after the
vote of the Company's stockholders at the Special Meeting. The Company's
costs incurred in connection with the Merger are estimated at $175,000.
PROPOSAL 1
Change Name to Mehl/Biophile International Corporation
The Agreement provides that the name of the Company will be changed to
"Mehl/Biophile International Corporation" upon the effectiveness of the
Merger. The proposed name change will be effected by an amendment of the
Company's Certificate of Incorporation, which requires the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock at the
Special Meeting. If approved, the Company's name change will be effective
upon filing of an amendment to the Certificate of Incorporation promptly after
the effectiveness of the Merger. If the Merger is not consummated or is
abandoned, the Company will retain its present name.
The Board of Directors recommends that the Shareholders vote in favor of the
above proposal.
PROPOSAL 2
Authorization of up to 60,000,000 Shares of Common Stock
The Company's Certificate of Incorporation currently authorizes the issuance
of up to 20,000,000 Shares of Common Stock. As of April 17, 1996, there were
outstanding 14,497,423 shares of Common Stock. Accordingly, the Company does
not have authorized a sufficient number of shares of Common Stock necessary to
be issued to consummate the Merger. The closing of the Agreement is therefore
subject to the condition that the Company amend its Certificate of
Incorporation to authorize the additional shares of Common Stock to be issued
to the stockholders of Classy Lady pursuant to the Agreement. Management of
the Company believes it is advisable to authorize up to 60,000,000 shares of
Common Stock in connection with completion of the Merger and to have
authorized a sufficient number of additional shares which may be necessary or
advisable to be issued in the future. This amendment requires the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock at
the Special Meeting. A vote for Proposal 2 is a vote with respect to the
Merger which will result in a change of control of the Company.
The Board of Directors recommends that the shareholders vote in favor of the
above proposal.
<PAGE> 6
INFORMATION ABOUT THE MERGER
The Parties to the Merger
Selvac Acquisition Corp. ("Acquisition") is a wholly-owned subsidiary of the
Company formed for the purpose of effectuating a business combination of
Classy Lady. To date, Acquisition has engaged in no business activities and
has no offices.
Classy Lady is a company incorporated in 1994 under the laws of the
Commonwealth of Puerto Rico. Its principal place of business is Miramar
Street #610, San Juan, Puerto Rico, telephone (809) 722-7883. Classy Lady was
formed to exploit the hair removal technologies patented by two of its
principals, Mr. Thomas H. Mehl, Sr. and Dr. Nardo Zaias. The assets of Classy
Lady consist principally of the exclusive licensing rights granted to Classy
Lady by Mr. Mehl for a multiple hair removal technology and by Dr. Zaias for a
laser hair removal technology. In December 1995, Classy Lady executed a Joint
Venture Agreement with Laser Industries, Inc., a publicly held Israeli
corporation engaged in developing and marketing commercial laser technology
applications, to develop the Classy Lady laser hair technology. See
"Information About Classy Lady-Business."
The Merger Agreement
Pursuant to the Agreement, Classy Lady will merge with and into Acquisition.
Acquisition will be the surviving company in the Merger and the separate
existence of Classy Lady will be extinguished. As consideration for the
Merger, the Company will issue an aggregate of 15 million shares of Company
Common Stock on a pro rata basis to the shareholders of Classy Lady. As
negotiated by Classy Lady and unanimously approved by the stockholders of
Classy Lady, the Agreement also provides for the issuance of up to an
additional 10 million shares of Common Stock upon the achievement of certain
designated milestones to such Classy Lady shareholders as may be designated in
writing by the holders of not less than 51% of Classy Lady Common Stock
("Designated Recipients"). The milestones are tied to the achievement of
certain goals with respect to certain joint ventures described elsewhere in
this Proxy Statement (see "Information About Classy Lady-Business") and are
set forth below:
Milestone 1: Classy Lady has executed a Joint Venture Formation Agreement
with Laser Industries Limited ("LIL"). See "Information About Classy Lady -
Business - Joint Venture." If the Joint Venture Formation Agreement is in
effect at the closing of the Merger, Selvac will issue an aggregate of two
million shares of Common Stock to the Designated Recipients.
<PAGE> 7
Milestone 2: Upon the formation of the joint venture corporation ("JV Corp.")
contemplated by the Joint Venture Formation Agreement and the contribution by
LIL of a $3,500,000 promissory note to JV Corp., Selvac will issue an
aggregate of three million shares of Common Stock to the Designated
Recipients. The LIL promissory note will be for a term of three years and
will bear interest at the rate of 5.65% per annum. Under the agreement with
LIL, LIL is to perform certain managerial, consulting and administrative
functions for JV Corp. for which it shall be paid a monthly fee of $100,000
plus reimbursement of expenses. LIL will be entitled to offset the amounts
due to LIL from JV Corp. against any amount payable by LIL under the note.
Milestone 3: If Classy Lady enters into a second joint venture or other
business combination agreement (the "Second Joint Venture") with a partner
able to commercialize the Zaias Patent, Selvac will issue an aggregate of two
million shares to the Designated Recipients. With respect to Milestone 3,
management intends to compile a list of potential partners whom it believes,
based on such company's development, manufacturing and marketing experience of
technology products in the consumer and medical areas, may have the ability to
act as a suitable joint venture partner. In determining the ability of a
potential partner to commercialize the Company's technology, management will
evaluate the potential partner's: level of experience in developing similar
or related technologies; capabilities of their research and development staff;
level of experience in developing products requiring approval from the FDA and
other regulatory authorities and conducting the related clinical trials; track
record in marketing and distributing similar or related technological
products; and overall financial condition and industry reputation.
Milestone 4: If the Second Joint Venture raises an aggregate of not less than
$5,000,000 through a private placement or public offering, Selvac will issue
an aggregate of three million shares to the Designated Recipients.
Classy Lady has advised the Company that the Designated Recipients will be
Thomas L. Mehl, Sr. and Dr. Nardo Zaias, each of whom will receive an equal
amount of additional shares of Company Common Stock upon the achievement of
the milestones described above. Classy Lady has advised the Company that this
designation is based on the fact that such individuals contributed to Classy
Lady all of the assets being acquired by the Company in the Merger. As of the
date of this Proxy Statement, Milestone 1 has been achieved and, assuming that
the Joint Venture Formation Agreement is still in effect as of the closing of
the Merger, each of Mr. Mehl and Dr. Zaias will be entitled to receive an
additional 1,000,000 shares of Company Common Stock.
Management of the Company believes that it is substantially likely that
Milestone 2 will be achieved within a relatively short time period after the
Closing and that therefore the Company is substantially likely to issue a
minimum of 20,000,000 shares of Common Stock in connection with the Merger.
The remaining 5,000,000 shares will be issued only upon the achievement of
Milestones 3 and 4 with respect to the Second Joint Venture. Management of
the Company believes that the issuance of the additional shares upon the
achievement of such milestones is comparable to an "earn-out" provision common
to many corporate transactions whereby consideration to be paid after the
closing of a transaction is contingent upon post-closing events. Therefore,
Management notes that the ultimate number of shares which may be issued by the
Company may increase if additional value is added to the Company as a result
of the achievement of the designated milestones.
<PAGE> 8
The Agreement further provides that in the event that the Company's interest
in either the LIL Joint Venture or the Second Joint Venture (or any comparable
replacement thereof) is sold, the proceeds from such sale shall be apportioned
as follows:
All amounts up to $50 million Payable to Classy Lady
Amounts in excess of $50 million 75% to Classy Lady,
up to $100 million 25% to the Designated
Recipients
Amounts in excess of $100 million 50% to Classy Lady,
50% to the Designated
Recipients
Upon completion of the Merger, any amounts payable to Classy Lady shall be
payable to Acquisition as the surviving corporation in the Merger.
The Agreement provides that the Company and Thomas L. Mehl, Sr., Chairman and
President of Classy Lady, and upon consummation of the Merger, to be Chairman
and Chief Executive Officer of the Company, agree to dismiss the existing
litigation between Mr. Mehl and the Company regarding a prior license from Mr.
Mehl to the Company. The parties will enter into a full settlement and
release with respect to such litigation. Neither party will pay any money or
other consideration to the other in connection with such settlement and
release. See "Material Contacts and Arrangements" and "Information About the
Company-Business-Legal Proceedings."
Pursuant to the Agreement, at the closing of the Merger, the Company's Board
of Directors shall consist of seven persons, Allan Borkowski (presently
Chairman of the Company), James J. Leonard (presently President of the
Company), Thomas L. Mehl, Sr. (presently Chairman and President of Classy
Lady) and four individuals designated by Mr. Mehl. Mr. Mehl will be Chairman
of the Board and Chief Executive Officer. As of the closing, the present
shareholders of Classy Lady will own a majority of the Company's Common Stock,
thus resulting in a change of control of the Company.
<PAGE> 9
Reasons for the Transaction
Virtually all of the Company's business is derived from the sale of its
Finally Free product, revenues for which have declined from approximately $3.8
million in fiscal year 1993 to approximately $2.7 million in fiscal year 1995.
Management of the Company believes that with only one product being actively
marketed at the present time, the declining sales faced by such product,
substantial dependance for product sales on one principal customer, the
inability to manufacture and market such product in the United States and the
absence of any new products with substantial sales prospects, its current
operational and financial condition is not strong. See "Information About the
Company-Business and Management's Discussion and Analysis."
The Board does not foresee a substantial improvement in the Company's results
based on its current and proposed products and operations, nor does it believe
that the Company is otherwise an attractive merger or acquisition candidate
for a third party based on the current operational and financial condition of
the Company as described above. Having been active in the hair removal
industry for many years, management of the Company believes it is generally
aware of the opportunities for expansion of its business, whether by
acquisition, merger or otherwise. The Board has not identified any other
potential business partners, significant growth opportunities which it is
currently able to develop or otherwise identify any viable alternatives to the
Merger. The Company believes that the multiple hair removal technology
licensed by Classy Lady from Mr. Mehl and the laser hair removal technology
licensed by Classy Lady from Dr. Zaias present substantial commercial
opportunities for product development and marketing which are not present in
the Company's existing or proposed operations.
The Board recognizes that commercial exploitation of the multiple and laser
hair removal technologies will be subject to the uncertainty of successful
commercialization of such technologies. Such uncertainties include the
raising of substantial additional capital; whether such technologies can
produce products and services which can be marketed and sold profitably; the
risk that its patent rights may infringe intellectual property rights held by
third parties; the risk of competing with other companies having substantially
greater financial and operational resources; the need to obtain pre-market
clearance or approval from the FDA to manufacture and market its products in
the United States and foreign regulatory approval; and the uncertain impact of
a change in control and new management on the business and operations of the
Company.
The Board of Directors has considered the Company's existing financial
condition, prospects for future growth earnings, and the risks posed by the
Merger discussed above and the following factors concerning the Merger:
Management of the Company believes that there is a substantial domestic and
international market for hair removal products which may potentially be
addressed by the technology presently licensed by Classy Lady and which could
not be addressed by the Company in the absence of rights to such technology.
Management is aware that other companies are currently making significant
expenditures to develop and market products for this field, notably Thermolase
Corporation and Palomar Medical Technologies, Inc., both of whom are
developing laser hair removal technologies. Management of the Company
believes that the actions of such other companies support its view that there
is a significant market opportunity for the Company to attempt to exploit upon
completion of the Merger. Management further notes that Thermolase has
received pre-market clearance from the FDA for its laser hair removal product
and the Company believes that this fact will have a positive impact on the
ability for Classy Lady's hair removal system to achieve such clearance.
<PAGE> 10
The Company is substantially dependent on overseas sales of its Finally
Free product, which sales have been steadily declining. Although the Company
has sold a substantial quantity of Finally Free products since the product was
introduced in 1985, management believes that such product is nearing the end
of its product cycle. The Finally Free product was invented by Thomas C.
Mehl, Sr. and management believes that the multiple hair removal technology,
also invented by Mr. Mehl and licensed by Classy Lady, provides significant
advantages over existing hair removal products, including those currently
marketed by the Company, and presents a strong opportunity for the Company to
expand sales of hair removal products.
Management has, in connection with patent counsel to the Company, reviewed
the patents licensed exclusively by Classy Lady and believes that such patents
provide the basis on which the Company would be able to compete with other
companies manufacturing and marketing hair removal systems.
The Board has received the opinion of Heritage Capital Corp. ("Heritage"),
an investment banking firm, that the consideration to be paid by the Company
in connection with the Merger is, from a financial point of view, fair to the
stockholders of the Company; See "Opinion of Investment Bankers." This
opinion is derived in part from an analysis of the discounted cash flows
projected from the future operations of the Company and Classy Lady, an
analysis of acquisition premiums and of market trading prices. The Heritage
fairness opinion assumes that all 25 million shares of Common Stock will be
issued upon consummation of the Merger. Management of the Company believes
the Heritage analysis provides reasonable support that the expected future
economic commercial value of the assets to be acquired from Classy Lady
supports approval of the Merger on the terms and conditions described herein.
Management of the Company has received significant interest from various
financial institutions to assist it in funding the combined operations of the
Company and Classy Lady. While there is no assurance that any such financing
can or will be consummated on terms acceptable to the Company, management
believes that such interest supports its view that the Merger represents a
substantial commercial opportunity for the Company. The Company also notes
that in the two month period prior to the public announcement of negotiations
for the Merger, the Company's Common Stock regularly traded on the Nasdaq
Small Cap Market in the $.18 to $.25 ranges. During the months of January
through March 1996, after public announcement of execution of the Merger
Agreement, the Company's Common Stock has regularly traded in the $2.25 to
$2.80 range on higher trading volumes. Management believes that the response
of the public capital markets supports the view of management that the Merger
would add substantial economic value to the prospects of the Company.
Based on the foregoing and after careful review of the risks associated with
the development of such opportunities, the Board has determined that the
Merger is the Company's best option which is likely to be or become available
to it and believes that the Merger is in the best interests of the Company and
its stockholders. If the Merger is not consummated the Company will continue
its existing marketing operations and product development activities.
<PAGE> 11
Opinion of Investment Banker
The Company's Board of Directors retained Heritage to advise it as to the
fairness to the Company's stockholders of the consideration to be paid to the
shareholders of Classy Lady pursuant to the terms of the Agreement by the
Company.
Heritage is an investment banking firm regularly engaged in the valuation of
companies and their securities in connection with mergers and acquisitions.
The Board selected Heritage on the basis of its ability to evaluate the
fairness of the consideration to be received by the Classy Lady stockholders
pursuant to the financial terms of the Agreement, its qualifications, previous
experience and its reputation in the banking and investment banking
communities. The consideration to be paid by the Company in the Merger was
determined by arm's-length negotiation between the Company and Classy Lady and
was not recommended by Heritage.
On March 22, 1996 Heritage advised the Board of Directors of Selvac that the
proposed consideration to be paid to the shareholders of Classy Lady pursuant
to the Amended and Restated Agreement and Plan of Offer and Merger Dated as of
February 15, 1996, taken as a whole, is fair to the common shareholders of
Selvac from a financial point of view. Heritage delivered its written opinion
confirming such oral advice later that day. The opinion of Heritage does not
constitute a recommendation to any Selvac stockholder as to how such
stockholder should vote. Heritage did not make or seek to obtain appraisals
from third parties of Classy Lady's assets in connection with its analysis of
Classy Lady. No limitations were imposed by the Board of Directors of Selvac
or Classy Lady upon Heritage with respect to the investigations made or the
procedures followed by Heritage in rendering its opinion, and management of
Selvac and Classy Lady cooperated fully with Heritage in its analysis of
Selvac and Classy Lady. For purposes of its opinion, Heritage assumed and
relied upon, without independent verification, the accuracy and completeness
of the financial and other information obtained by Heritage from public
sources and from Selvac and Classy Lady and their affiliates and advisors.
The Board of Directors reviewed the reports of Heritage concerning a
discounted cash flow analysis, a capitalization of net operating income
analysis, a market comparison of comparable publicly traded companies, market
trading prices of Selvac Common Stock and an acquisition premium analysis of,
as appropriate, Selvac and Classy Lady. The following is a summary of such
analyses:
1. Discounted Cash Flow Analysis. Heritage performed a discounted cash flow
analysis for the purposes of determining the relative equity values of Selvac
and Classy Lady based upon projections of Operating Cash Flows (the
"Projections") provided by the management of Selvac and Classy Lady. A
sensitivity analysis was performed by applying various discount rates and
terminal value capitalization ratios assumptions to the projected cash flows,
using the Projections through fiscal 2000. For Selvac, discount rates of 10%,
12% and 14% and a terminal value capitalization ratio of four times after tax
operating income were used. Heritage elected to use these discount rates and
the terminal value capitalization ratio in order to take into consideration
the fact that only one product is being marketed at this time, the sales of
this product are declining, sales are substantially dependent on one principal
customer, and there are other marketing and financial problems. For Classy
Lady, discount rates of 18%, 20% and 22% and a terminal value capitalization
ratio of 12.5 times after tax income were used. Heritage elected to use these
discount rates and the terminal value capitalization ratio in order to take
into consideration the start up nature of the business including the lack of
510(k) pre-market clearance from the Federal Drug Administration ("FDA"), the
lack of a market ready product and of other marketing and financial resources.
In selecting the discount rates and terminal value capitalization ratio used
for Selvac and Classy Lady, Heritage also considered certain financial market
related factors. Heritage's discounted cash flow analysis considered
alternative rates of growth in revenues and expenses. In the Expected Case,
Heritage noted that the Total Present Value of Selvac was $2,220,258 and the
Total Present Value of Classy Lady was $5,066,399. Heritage noted that of the
sum of the Total Present Values of Selvac and Classy Lady of $7,286,657,
Selvac provided 30.5% and Classy Lady provided 69.5%. Heritage noted that if
all 25,000,000 shares of Selvac were issued to the Classy Lady stockholders
upon consummation of the Merger, such persons would own 64% of the total
outstanding shares of the combined company after the Merger, Mehl/Biophile
International Corporation ("MEHL").
<PAGE> 12
2. Capitalization of Net Operating Income Analysis. Heritage considered the
historical operating results of Selvac and Classy Lady. Classy Lady is a
start up company without operating income and Selvac has not had significant
operating income in recent years. Accordingly, Heritage was not able to do a
meaningful analysis of operating income. Heritage also considered the
historical revenues of Selvac and Classy Lady. Since Selvac's revenues had
declined significantly over the recent past and Classy Lady has no revenues,
Heritage has determined that revenues could not be used as an indication of
relative values.
3. Analysis of Comparable Publicly-Traded Companies. Heritage noted that it
was difficult to select publicly-traded companies that could be used to
establish meaningful comparisons with Selvac and Classy Lady. In its market
comparison analysis, Heritage reviewed numerous companies in related
businesses and selected two companies engaged in lines of business somewhat
similar to those of Selvac and Classy Lady. The two companies were Thermolase
Corporation ("Thermolase") and Palomar Medical Technologies, Inc. ("Palomar").
Meaningful comparisons with Thermolase and Palomar are not possible for a
number of reasons. Neither Thermolase nor Palomar are generating operating
income as of their most recent financial statements which are dated December
30, 1995 and December 31, 1995, respectively. Accordingly, a comparison of
operating income is not possible. Also Selvac and Classy Lady are in
different stages of development. Selvac has an extremely limited product line
with declining sales. Classy Lady is a start up company has no prior
operating results and its products do not have 510(k) pre-market clearance
from the FDA. On the other hand, Palomar and Thermolase have operating
revenues. Thermolase has received 510(k) pre-market clearance from the FDA to
commercially market professional laser services using its SoftLight system and
has begun to receive revenues from this system. While Palomar is developing
and marketing laser products, most of its revenues are derived from electronic
products. Accordingly, the divergent development stages of the companies, the
different product lines and, with the exception of Selvac, the lack of
operating income, do not provide the basis for a meaningful comparison of the
companies with Thermolase and Palomar.
<PAGE> 13
4. Acquisition Premium Analysis. Heritage analyzed premiums paid in
transactions in which the price was disclosed and a premium was paid for the
period 1986-1995. Premiums are often used by analysts to compare the amounts
in excess of market price which are paid in acquisitions. Heritage noted that
the average premium paid during this period ranged from 35.1% in 1991 to 44.7%
in 1995. In addition, Heritage selected two industry classifications for
analysis. These were Drugs, Medical Supplies & Equipment and Toiletries &
Cosmetics. In 1995, there were 16 reported transactions with premiums paid in
Drugs, Medical Supplies & Equipment and three reported transactions in 1995
with premiums paid in Toiletries & Cosmetics. Heritage noted that none of the
19 transactions involved businesses strictly comparable to the business of
Selvac and Classy Lady. The value of the 16 transactions in the Drugs,
Medical Supplies & Equipment industry classification analyzed ranged from $9
million to $7.1 billion. The average premium based on the stock price five
business days prior to the merger/acquisition announcements was 27.0%. The
value of the three transactions in the Toiletries and Cosmetics industry
classification ranged from $120 million to $508 million. The average premium
based on the stock price five business days prior to the merger/acquisition
announcements was 31.7%. Heritage has reviewed the trading history of the
common stock of Selvac from August 1, 1995 to March 22, 1996. The premium
based on the average of the closing bid and ask prices of 1/4-9/32 or 17/64 on
September 26, 1995, five business days prior to the Press Release regarding
preliminary negotiations between Selvac and Classy Lady (the "Press Release")
and the average of the closing bid and ask prices of 1-1 1/32 or 11/64, on
October 3, the day of the Press Release, is 282%. The premium based on the
average of the closing bid and ask prices of 1/4-9/32 or 17/64 on September
26, 1995 and the average of the opening bid and ask prices on March 22, 1996
of 3-3 1/8 or 3 1/16 is 1053%. This premium is significantly above any of the
industry or other premiums discussed above. Analysts often consider large
premiums over market price as an indication that acquired companies and their
shareholders are benefiting from a higher valuation of the equity of their
company. Heritage has advised the Company that it believes that the
shareholders of Selvac are benefitting from a higher valuation of the equity
of their company than would be the case without the proposed merger. Heritage
believes that the large premium reflects the fact that investors expect to
benefit from the proposed merger and the commercialization of the Mehl and
Zaias patents. Heritage also noted that the market value of the 14,088,526
outstanding shares of Selvac based on the average of the closing bid and ask
prices of 1/4-9/32 or 17/64 on September 26, 1995 is approximately $3,742,264,
based on the average of the closing bid and ask prices of 1-1 1/32 on October
3, 1995 or 1 1/64, is approximately $14,308,307 and based on the average of
the opening bid and ask prices of 3-3 1/8 on March 22, 1996 or 3 1/16 is
approximately $43,146,110.
The summary set forth above describes the material points of the more detailed
analyses performed by Heritage in arriving at its fairness opinion. Heritage
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create an incomplete view of the
processes underlying its opinion. The preparation of a fairness opinion is a
complex process involving subjective judgment and is not necessarily
susceptible to partial analysis or summary description. In its analysis,
Heritage made a number of assumptions, which include that business and
economic conditions would remain essentially the same as those existing
currently. Any estimates contained in such assumptions are not necessarily
indicative of actual values, which may be significantly more or less favorable
than those set forth herein.
<PAGE> 14
Estimates of values of companies do not purport to be appraisals or
necessarily reflect the prices at which companies may actually be sold.
Because such estimates are inherently subject to uncertainty, Selvac or Classy
Lady do not assume any responsibility for their accuracy.
In arriving at the opinion expressed in the Fairness Opinion Heritage put no
weight on the net operating income or comparable publicly traded companies
analyses. Heritage believes that the discounted cash flow, market trading
price and acquisition premium analysis provide the best measure of value.
Heritage discussed and reviewed the business history and future prospects of
Selvac and Classy Lady with the senior management and advisors of Selvac and
Classy Lady. Heritage discussed Selvac's current financial condition, the
history of declining sales and profits, the substantial dependence on one
product, the limited number of customers and the need for new products and
customers.
Heritage discussed with Classy Lady's management their current situation,
including but not limited to, the plans to exploit the hair removal
technologies patented by Mr. Thomas H. Mehl, Sr. and Dr. Nardo Zaias, as the
assets of Classy Lady consist principally of the exclusive licensing rights
granted to Classy Lady by Mr. Mehl for a multiple hair removal technology and
by Dr. Zaias for a laser hair removal technology. Heritage reviewed copies of
the licenses, the patents, the plans for the commercialization and marketing
of these products. In addition, Heritage discussed and reviewed the Joint
Venture Agreement with Laser Industries, Inc. that Classy Lady had executed
for the purpose of developing and marketing commercial laser technology
applications for the Classy Lady laser hair technology.
As compensation for providing the fairness opinion, the Company paid Heritage
the sum of $45,000. There is no other material relationship between Heritage
and the Company or its affiliates.
Tax Treatment of the Merger
It is the intention of the Company and Classy Lady that the Merger be treated
as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended (the "Code"). If the Merger is treated as a reorganization under
Section 368(a) of the Code, the following tax consequences will result:
<PAGE> 15
(a) No gain or loss will be recognized by holders of Classy Lady
Common Stock on the exchange for shares of Company Common
Stock;
(b) The aggregate tax basis of the Company Common Stock received
by each Classy Lady stockholder (including any fractional
shares of Company Common Stock deemed received, but not
actually received) will be the same as the aggregate tax basis
of the shares of Classy Lady Common Stock surrendered in
exchange therefore;
(c) The holding period of the shares of Company Common Stock
received by each Classy Lady stockholder will include the
period during which the shares of Classy Lady Common Stock
exchanged therefor were held, provided that the shares of
Classy Lady Common Stock were a capital asset in the holder's
hands;
(d) No gain or loss will be recognized by the Company or
Acquisition as a result of the transaction. The basis and
holding period for the assets formerly held by Classy Lady will
not change as a result of the transaction.
(e) As a result of the Merger it is anticipated that future use of
the Company's US Federal net operating loss ("NOL")
carryforwards will be subject to limitations under Sections 382
and 1502 of the Code. Essentially the amount of the Company's
pre-merger NOL deduction would be subject to an annual
limitation equal to the value of the Company's stock on the
date of the merger multiplied by the "long-term tax-exempt
rate" (published monthly by the Internal Revenue Service) for
the month of the Merger. Additionally, NOL's attributed to
members of the Company's consolidated group prior to the Merger
can only be used to offset against post merger taxable income
of pre-merger consolidated group members.
Should the transaction not qualify as a tax-free reorganization, former
shareholders of Classy Lady would be subject to income tax on the exchange of
their stock and the Company's tax basis in the assets formerly held by Classy
Lady will be appropriately increased.
Accounting Treatment
The Company intends to account for the merger as a non-monetary exchange,
applying the provisions of APB 29 "Accounting for Non-Monetary Transactions".
Valuation of the assets acquired is to be based on the value of the Company's
Common Stock to be issued as consideration. The value of shares to be issued
subject to the resolution of contingencies will not be considered in valuing
the acquired assets until the outcome of such contingencies are resolved.
<PAGE> 16
Regulatory Requirements
Other than filing a Certificate of Merger with the State of Delaware and the
Commonwealth of Puerto Rico, there are no Federal or State regulatory
requirements which must be complied with or approvals which must be obtained
in connection with the Merger.
Material Contacts and Arrangements
In September 1995, Thomas L. Mehl, Sr. contacted the Company to discuss a
potential business combination. Mr. Mehl identified licensing rights held by
Classy Lady regarding the multiple hair removal technology and the laser hair
removal technology and indicated he would be willing to transfer such rights
to the Company in exchange for an equity interest. The Company stated that it
was interested in pursuing such a transaction and commenced preliminary
discussions while simultaneously reviewing the patents underlying such
licensing rights. The parties commencing negotiating how many shares of the
Company's Common Stock to issue in exchange for the licensing rights. After
discussions and negotiations, a letter of intent regarding the Merger was
executed on October 11, 1995. The Letter of Intent provided that the Company
would enter into a business combination with Classy Lady in exchange for the
issuance of 15,000,000 shares of Company Common Stock and unspecified further
consideration to be negotiated by the parties. Following further due
diligence investigations and negotiation of the terms of the additional
consideration in the form of 10,000,000 shares of Common Stock to be issued
upon the achievement of certain specified milestones, the Agreement was
executed on December 18, 1995. For the reasons set forth above in "Reasons
for the Transaction", the Company did not during such negotiations actively
consider any alternatives to the Merger. Other than the foregoing, the
Company has not had any prior contacts, arrangements or relationships with
Classy Lady. No officer, director or principal shareholder of the Company is
an officer, director or shareholder of Classy Lady.
The Company has had a substantial prior relationship with Thomas L. Mehl, Sr.
and affiliated companies. On April 22, 1985, the Company acquired all of the
outstanding capital stock of (a) The Mehl International Corporation ("MIC")
and (b) Nutrolysis International Corporation (Nutrolysis) for 1,000,000 and
100,000 shares, respectively, of common stock of the Company. Certain
additional cash payments were made, and royalty payments of 2% of net Finally
Free Hair Remover (Finally Free) worldwide sales collections are being made to
the stockholders of MIC. As part of the acquisition, the Company was assigned
the rights to an exclusive License Agreement with Thomas L. Mehl, Sr., the
inventor of Finally Free, for the licensed patent rights to his invention.
Royalty expense under the agreements for fiscal years ended May 31, 1995,
1994, and 1993 was approximately $53,000, $64,000 and $96,000 respectively.
(See "Information About the Company - Business Development").
A dispute arose as to the Company's compliance with the terms of the Mehl
license, culminating with Mehl's counsel sending a letter which asked for an
accounting for royalties paid under the license. Mehl's counsel later decided
to interpret the letter as a termination notice letter, despite the letter's
clear language which asked only for an accounting. In order to protect its
interests, on March 20, 1991, the Company filed a complaint in the Federal
District Court in Massachusetts (Civil Action No. 91-10868-Z) against Mr.
Mehl. The complaint sought a declaratory judgment that (a) the exclusive
license held by the Company as licensee of Mr. Mehl was in full force and
effect; (b) that certain monies alleged to be owed to Mr. Mehl as royalties
for replacement parts and returned goods were in fact not payable under the
license; (c) that the Company's exclusive license extended to Mehl's new
inventions; and (d) that Mehl be enjoined from terminating the license or
negotiating with others a license to the technology already licensed to the
Company. The parties entered into a stipulation under which Mehl agreed that
he would take no action regarding the license, including terminating the
license or offering or negotiating with others to license the technology
licensed to the Company, until the Court holds an evidentiary hearing. No
hearing on the matter has been requested or occurred to date. Mehl has filed
an answer as well as a number of affirmative defenses and counterclaims. (See
"Information About the Company - Legal Proceedings").
<PAGE> 17
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet as of February
29, 1996, and the unaudited pro forma consolidated statements of operations
for the nine months ended February 29, 1996 and the year ended May 31, 1995
give effect to the Merger and the issuance of 15,000,000 shares of Company
Common Stock, in exchange for 100% of the outstanding Classy Lady stock,
together with an additional 5,000,000 shares as described below. The
unaudited pro forma consolidated financial information is based on the
historical financial information of the Company and Classy Lady as of February
29, 1996 and the pro forma adjustments described in the notes thereto.
Pursuant to the Merger Agreement, the Company may issue up to an additional 10
million shares of Common Stock upon the achievement of certain milestones.
See "The Merger Agreement." As of the date of this Proxy Statement, the first
such milestone (which triggers the issuance of an additional two million
shares) has been achieved and management of the Company believes that it is
substantially likely that the second milestone (which triggers the issuance of
an additional three million shares) will be achieved within a relatively short
time period after the Closing. Therefore, the Company is substantially likely
to issue a minimum of 20 million shares of Common Stock in connection with the
Merger.
Information was prepared as if the Merger were effected as of February 29,
1996 in the case of the unaudited pro forma consolidated balance sheet; as of
June 1, 1994 in the case of the February 29, 1996 and May 31, 1995 unaudited
pro forma statements of operations. These unaudited pro forma financial
statements may not be indicative of the results that actually would have
occurred if the Merger had been in effect on the dates indicated or which may
be obtained in the future. The unaudited pro forma financial information
should be read in conjunction with the financial statements and other
financial data of the Company included elsewhere herein.
<PAGE> 18
<TABLE>
<CAPTION>
SELVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 1996
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
(UNAUDITED)
Selvac Classy Lady Proforma
Corporation By Mehl (Unaudited)
and of Puerto
Subsidiary Rico, Inc. Adjustments Consolidated
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 845 $ 845
Accounts receivable, net 591 591
Finished goods inventories 502 502
Note receivable, current portion 102 102
Other current assets 41 (2) $(2) 39
Total current assets 2,081 (2) 2,079
PROPERTY AND EQUIPMENT, net 41 39 80
PATENTS AND PATENT RIGHTS, net 113 14 (1) 1,280 1,407
EXCESS OF COST OVER FAIR VALUE OF
ASSETS ACQUIRED, net 28 28
NOTE RECEIVABLE - RELATED PARTIES, net
of current portion 448 (2) (300) 148
OTHER ASSETS
Investment in non-marketable securities 750 750
Other 52 52
$3,513 $ 53 $ 978 $4,544
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $182 $ 182
Accrued expenses 50 $85 (2) $(2) 133
Notes payable, related party 300 (2) (300)
Other current liabilities 23 23
Total current liabilities 255 385 (302) 338
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value,
authorized-200,000 shares:
Series A, 12% cumulative convertible;
Issued and outstanding-17,000 shares 170 170
1985 Series, 12% cumulative convertible;
Issued and outstanding-16,500 shares 165 165
Common stock, $.01 par value,
authorized-20,000,000 shares:
Issued-16,717,485 shares of Selvac and
36,717,485 proforma shares 167 1 (1) 199 367
Additional paid-in capital 9,169 (1) 1,081 10,250
Receivable for stock (1) (1)
Accumulated deficit (5,461) (332) (5,793)
Unrealized gain-marketable securities 4 4
4,214 (332) 1,280 5,162
Treasury stock, at cost, 2,474,959 common
shares (956) (956)
Total stockholders' equity 3,258 (332) 1,280 4,206
$3,513 $ 53 $ 978 $4,544
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
SELVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 29, 1996
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Selvac Classy Lady Proforma
Corporation By Mehl (Unaudited)
and of Puerto
Subsidiary Rico, Inc. Adjustments Consolidated
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales $1,596 $1,596
COST OF REVENUES 951 951
GROSS MARGIN 645 645
OPERATING EXPENSES:
Research and development $ 17 17
Selling, general and administration 935 315 (3) $117 1,365
(4) (2)
935 332 115 1,382
(290) (332) (115) (737)
OTHER INCOME 161 (4) (2) 159
LOSS BEFORE INCOME TAXES (129) (332) (117) (578)
RECOVERY OF INCOME TAXES 0 0 0 0
NET LOSS $ (129) $(332) $(117) $ (578)
NET LOSS PER COMMON SHARE $ (.01) $ (.02)
LOSS APPLICABLE TO COMMON STOCK $ (159) $ (608)
WEIGHTED AVERAGED NUMBER OF COMMON
SHARES AND DILUTIVE COMMON EQUIVALENT
SHARES OUTSTANDING DURING PERIOD 13,937,595 33,937,595
WEIGHTED AVERAGED NUMBER OF COMMON
SHARES ASSUMING FULL DILUTION DURING
PERIOD 13,937,595 33,937,595
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 20
SELVAC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MAY 31, 1995
<TABLE>
<CAPTION>
Selvac Classy Lady Proforma
Corporation By Mehl (Unaudited)
and of Puerto
Subsidiary Rico, Inc. Adjustments Consolidated
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales $ 2,745 $2,745
COST OF REVENUES 1,563 1,563
GROSS MARGIN 1,182 1,182
OPERATING EXPENSES:
Selling, general and administrative 1,088 (3) 134 1,222
Loss on sale of property and equipment 20 20
Loss on sale of marketable securities 8 8
1,116 134 1,250
66 (134) (68)
INTEREST INCOME 127 127
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 193 (134) 59
PROVISION FOR INCOME TAXES 49 49
NET INCOME $ 144 $ 0 $(134) $ 10
NET INCOME (LOSS) PER COMMON SHARE: $ .01 $ (.00)
INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 86 $ (48)
WEIGHTED AVERAGED NUMBER OF COMMON
SHARES AND DILUTIVE COMMON
EQUIVALENT SHARES OUTSTANDING DURING
PERIOD 14,345,234 34,345,234
WEIGHTED AVERAGED NUMBER OF COMMON
SHARES ASSUMING FULL DILUTION DURING
PERIOD 14,345,234 34,345,234
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 21
SELVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS
Acquisition:
On December 18, 1995 Selvac Corporation and its wholly-owned acquisition
subsidiary, Selvac Acquisition Corp., (collectively referred to as "the
Company"), and Classy Lady by Mehl of Puerto Rico, Inc., a privately-held
company ("Classy Lady"), signed an Agreement and Plan of Merger (the
"Agreement") whereby Classy Lady will merge with and into the Company.
Pursuant to the Agreement, the Company will issue 15,000,000 additional shares
of its Common Stock to the Shareholders of Classy Lady. The Agreement, which
is effective as of January 1, 1996, also provides for the issuance of up to
10,000,000 shares of Common Stock of the Company upon the achievement of
designated milestones in connection with certain proposed joint ventures to be
undertaken by Classy Lady. It is substantially likely that 5,000,000 of such
additional shares will be issued in a short time period after the closing of
the Merger. These shares are included with shares not subject to
contingencies in the proforma presentation.
Prior to January 1996, Classy Lady has had no activities other than the
contribution of certain patent licensing rights to Classy Lady by its founders
in exchange for Common Stock rights.
Included in selling, general and administrative expenses for Classy Lady are
royalties of $60 for royalties due under minimum royalty arrangements.
Proforma Adjustments:
The proforma adjustments give effect to the transaction, accounted for as a
non-monetary exchange, as if it had occurred on June 1, 1994 and include
5,000,000 contingent shares expected to be issued shortly after the Merger.
As a valuation of the Classy Lady intangible assets would be highly
subjective, such valuation is based on the value of the Company's common
shares to be issued, excluding those subject to unresolved contingencies
(contingent shares). The value of the acquired assets will be increased
proportionately for the value of remaining 5,000,000 contingent shares, when
and if they become issuable upon resolution of the contingencies.
Classy Lady patent and patent rights are amortized over their estimated
economic useful lives which range from 6 to 9 years. Amortization is
calculated beginning the later of June 1, 1994 or the issue date of the
particular patent.
February 29, 1996 Balance Sheet Adjustments:
(1) Issuance of 20,000,000 (including 5,000,000 contingent shares) shares of
the Company's common stock in exchange for all of the voting stock and
stock rights in Classy Lady:
Increase
(Decrease)
Assets:
Patents and Patent Rights $1,280
Liabilities and Stockholders Equity:
Selvac $.01 par, value Common Stock issued $ 200
Classy Lady Common Stock (1)
Additional Paid-in-Capital 1,081
$1,280
(2) Elimination of intercompany note balances and related accrued interest
Increase
(Decease)
Assets:
Notes receivable - related parties $(300)
Other current assets (2)
$(302)
Liabilities:
Notes payable, related party $(300)
Accrued expenses (2)
$(302)
<PAGE> 22
SELVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS
Adjustments to the Statements of Operations:
(3) Increase in amortization expense resulting from increase in carrying
amounts of patents and patent rights:
Nine Months
Year Ended Ended
May 31, 1995 February 29,1996
Operating expenses $134 $117
(4) Elimination of interest income and interest expense on intercompany note
balances
Increase
(Decrease)
Operating expenses $(2)
Other income $(2)
<PAGE> 23
INFORMATION ABOUT THE COMPANY
The Company is incorporated under the laws of Delaware. After the sale of
substantially all of the assets used in the Company's Home Entertainment
Segment effective at the close of business on May 31, 1994, the Company's
Personal Care Appliance division was its only significant industry segment.
Business Development:
On April 22, 1985, the Company acquired all of the outstanding capital
stock of (a) The Mehl International Corporation (Mehl) and (b) Nutrolysis
International Corporation (Nutrolysis) for 1,000,000 and 100,000 shares,
respectively, of common stock of the Company. Certain additional cash
payments were made, and royalty payments of 2% of net Finally Free Hair Remover
(Finally Free) worldwide sales collections are being made to the stockholders
of Mehl. As part of the acquisition, the Company was assigned the rights to
an exclusive License Agreement with Thomas L. Mehl, Jr., the inventor of
Finally Free, for the licensed patent rights to his invention. The Agreement
calls for payments of $1.50 per unit royalty for the first 500,000 units and
$1.00 per Finally Free unit thereafter for the life of the patents. All
royalties are based on net unit sales. Royalty expense under the agreements
for fiscal years ended May 31, 1995, 1994, and 1993 was approximately $53,000,
$64,000 and $96,000 respectively. An additional 100,000 shares of common stock
of the company were issued by the Company to an investment banker for
services in connection with the acquisition. Mehl was the owner of the Finally
Free hair removal appliance described below.
Effective January 1, 1988, the Company merged the assets of its two wholly
owned subsidiaries, The Mehl International Corporation and Nutrolysis
International Corporation into Selvac Corporation. The subsidiaries were
liquidated in order to reduce the administrative costs associated with
maintaining more than one corporation.
The Company entered the personal care appliance business in 1985 with its
acquisition of Mehl and Nutrolysis. Mehl owned the rights to a proprietary
patented method of hair removal that uses directed radio frequency waves. This
technology is employed in two products - a consumer appliance sold under the
trade name Finally Free and a professional appliance sold under the trade name
NU-Trolysis.
Both Finally Free and NU-Trolysis use the same energy, radio frequency. The
unit's patented plated tips grasp the unwanted hair above the skin line. There
is no needle, no head, and no pain. The radio frequency is transmitted from
the unit to the hair where it works to weaken the chemical structure of the
hair so that it can be easily removed.
<PAGE> 24
Selvac has the worldwide rights to manufacture and sell products sold under the
patented Mehl method to hair removal. The United States patents relating to
hair removal system expire in 1996. The Company holds trademarks for the names
"Selvac", "Finally Free", and "NU-Trolysis". Expiration of US patents is not
expected to have a significant impact on the Company's operations or financial
condition.
The U.S. Food and Drug Administration ("FDA") determined that the Company did
not have the appropriate marketing approval to sell Finally Free domestically.
The Company filed a number of appeals as well as developed and submitted new
data in an attempt to gain marketing approval. On June 28, 1991, the United
States District Court for the Eastern District of Pennsylvania approved a
settlement, the Company denied allegations of the complaint but agreed, among
other things, that the Company would not manufacture, process, pack, label,
promote, advertise, distribute, or sell Finally Free unless and until it
received marketing authorization from FDA. On December 6, 1991, FDA requested
that the Company provide additional information for its 510(k) filing as part
of the marketing authorization process. In February of 1992, Selvac received
export approval for existing domestic units of Finally Free to Canada from the
FDA. In July 1994, the FDA determined that Finally Free shall be considered a
Class III device under the Food, Drug and Cosmetic Act and accordingly, will
require premarket approval before it is sold, manufactured or distributed in
the U.S.
Finally Free has represented the single largest part of the Company's sales
since its acquisition. The uncertainty raised by the FDA situation caused the
Company to look toward its foreign markets for new marketing opportunities.
Hair removal is practiced worldwide, and the Company moved aggressively to open
new markets, distributors, and sources of supply. The Finally Free sales base
has shifted to international distribution primarily in Canada, England, Japan,
Australia, Spain, and Korea. Manufacture of the Finally Free is through a
manufacturer in the United Kingdom. Management believes that the international
appliance business segment represents the Company's best opportunity for sales
growth. The Company plans to continue to pursue additional international
markets during the next year as well as evaluate new appliances for its
distribution network.
Export sales primarily of Finally Free products, amounted to $2,733,000,
$2,897,000 and $3,823,000 in 1995, 1994 and 1993, respectively. The 1995
export sales were $2,090,000 to Japan and $322,000 to Europe. The 1994 export
sales included approximately $1,846,000 to Japan and $412,000 to Europe.
Export sales for 1993 included approximately $1,335,000 to Japan and $1,810,000
to Europe.
Sales to major customers as a percentage of total sales for the Company's
personal care appliance segment were as follows:
1995 1994 1993
Ikeda Corporation 76% 68% 36%
Cranley Distribution 36%
Impromedia S.L. 10% 25%
<PAGE> 25
Percentages not presented represent less than 10% of the sales from continuing
operations.
Any substantial decrease in sales to Ikeda Corporation would have a significant
detrimental impact on the Company's operations and financial condition.
The NU-Trolysis unit is sold to dermatologists, estheticians and salons for use
on their patients/clients. NU-Trolysis is offered for sale both domestically
and internationally. The NU-Trolysis system is marketed in the United States
pursuant to Section 510(k) Notification K780348, which was cleared by the FDA
on May 18, 1974. To the best of its knowledge, the Company is in compliance
with all manufacturing and annual registration requirements for this product.
The Company has moved its focus on skin care products overseas. The Finally
Firm Facial Toning System (Finally Firm) is being marketed in Korea. A test
market for this unique skin care product continues in Japan and another test
market in Taiwan is to begin in fiscal 1996. These efforts are not expected to
produce meaningful results prior to the summer of 1996. The Company will also
attempt to increase its market for Finally Firm in the United States and
Europe. While Finally Firm's sales accounted for less than 5% of revenues for
the Company's personal care appliance segment for each of the past three years,
efforts will be made to increase sales of this product in future years.
The Company is party to a Royalty Agreement with a concern entitled to
manufacturing rights for Finally Firm. The terms of this agreement call for
royalty payments of $15 per unit for sales of 25,000 units of Finally Firm
after the sale of the first 10,000 units. The Royalty amount is reduced to 3%
of sales for units sold thereafter. Royalty expense for the years ended May
31, 1995, 1994 and 1993, under the terms of this agreement, were $48,000,
$25,000 and $35,000, respectively.
The domestic personal care business has historically been highly seasonal, with
the fall selling season being its strongest period. The consent decree with
FDA has resulted in a shift in focus to international markets and
internationally, the Company believes that its business is not seasonal in any
material respect.
Research and development expenditures were less that .5% of consolidated net
sales for each of the past three years.
Selvac System:
Management of Selvac has decided to withhold any further investment in the
Selvac System until there is convincing evidence from consumers that such
investment would be productive. The Selvac System is a nonaerosol dispensing
unit employing a push-button continuous action mechanism.
Competitive Business Conditions:
As a result of FDA restrictions, the Company does not produce or sell its
Finally Free product in the US. Sales have been through arrangements with
distributors in Japan, Canada, Korea, Spain, United Kingdom, Australia,
Netherlands and other lesser significant foreign markets.
<PAGE> 26
Significant competitive products in this industry include over-the-counter
depilatory solutions, "waxing" products for home use and products which employ
technologies similar to those employed by Finally Free (knock-off products).
The Company markets its product as a painless alternative to commercially
available electrolysis and waxing without the potential for skin rashes and
irritation associated with depilatory solutions.
Many of the Company's competitors have greater financial and organizational
resources and more established markets and distribution channels than the
Company. The Company sells its Finally Free product at prices competitive with
those of knock-off products, with the benefit of patent protection and what
management considers to be superior design and performance qualities.
Additionally, the Company takes necessary actions to assure that its products
meet regulatory case-by-case basis concerning whether or not action is taken
against competitors offering products considered to be in violation of Company
patents. Such decisions give consideration to anticipated costs and benefits.
Resources:
At July 31, 1995, the Company employed 5 employees (4 full time and 1 part
time). As a marketing company, Selvac has elected not to manufacture its
product directly. In the case of Finally Free and Finally Firm appliances, the
Company owns the molds from which the plastic parts are produced as well as
some of the production equipment and uses two primary vendors for the actual
assembly work. Neither of these vendors is under contract and numerous
alternative vendors are available to produce the Company's products. No
unusual quality control, production or delivery problems have been encountered
with current suppliers.
Business Disposition:
Effective at the close of business on May 31, 1994, the Company sold
substantially all of the assets of Video Knights, Inc., its unprofitable
subsidiary, to Roadrunner Video Enterprises, Inc. for $350,000 cash and
promissory notes aggregating $1,060,000. For further information, see Note 4
to the consolidated financial statements.
The Company has retained the trademarks and franchising rights for "Video
Knights" and "Just the Hits". One video cassette retail facility is in
operation under a Video Knights franchise agreement at no cost to the Company.
There are no immediate plans or intentions to sell additional franchises.
Management has and will continue to entertain offers to sell its "Video
Knights" and "Just the Hits" trademarks and franchising rights.
<PAGE> 27
Backlog:
The sales order backlog of the Company, at any point in time, is negligible.
Orders are shipped from inventory as received and are based upon purchase
orders.
Properties:
The offices used for the Company's operations are located in Marlboro,
Massachusetts, and Ramsey, New Jersey and are rented on a month to month
basis. For the Company's warehousing requirements, it pays for the space
which it uses.
Present facilities are adequate for the Company's operations and no expansion
is anticipated in the immediate future.
Legal Proceedings:
Since January 1990, the Company has been engaged in an ongoing dispute with
FDA regarding the marketing status of Finally Free for personal
(nonprofessional) use.
On June 28, 1991, the United States District Court for the Eastern District of
Pennsylvania approved a settlement agreement between the Company and the FDA.
Pursuant to the settlement agreement, the Company denied the allegations of
the complaint but agreed, among other things, that the Company would not
manufacture, process, pack, label, promote, advertise, distribute, or sell
Finally Free unless and until it received marketing authorization from FDA.
On December 6, 1991, FDA requested that the Company provide additional
information for its 510(k) filing as part of the marketing authorization
process. New data was submitted to FDA in the 510(k) as part of the marketing
approval process.
In February of 1992, Selvac received export approval of Finally Free Hair
Remover to Canada from FDA.
In July 1994, the FDA determined that Finally Free shall be considered a Class
III device under the Food, Drug and Cosmetic Act and accordingly, will require
premarket approval before it is sold, manufactured or distributed in the U.S.
At the present time, management is uncertain as to whether the Company will
seek such approval. There can be no certainty that if such actions are taken,
they will be successful.
<PAGE> 28
The Company holds an exclusive license with Thomas L. Mehl, Sr. for certain
enumerated patents as well as Mehl's new inventions in the hair removal field.
A dispute arose as to the Company's compliance with the terms of that license,
culminating with Mehl's counsel sending a letter which asked for an accounting
for royalties paid under the license. Mehl's counsel later decided to
interpret the letter as a termination notice letter, despite the letter's
clear language which asked only for an accounting. In order to protect its
interests, on March 20, 1991, the Company filed a complaint in the Federal
District Court in Massachusetts (Civil Action No. 91-10868-Z) against Mr.
Mehl. The complaint sought a declamatory judgment that (a) the exclusive
license held by the Company as licensee of Mr. Mehl was in full force and
effect; (b) that certain monies alleged to be owed to Mr. Mehl as royalties
for replacement parts and returned goods were in fact not payable under the
license; (c) that the Company's exclusive license extended to Mehl's new
inventions; and (d) that Mehl be enjoined from terminating the license or
negotiating with others a license to the technology already licensed to the
Company. The parties entered into a stipulation under which Mehl agreed that
he would take no action regarding the license, including terminating the
license or offering or negotiating with others to license the technology
licensed to the Company, until the Court holds an evidentiary hearing. No
hearing on the matter has been requested or occurred to date. Mehl has filed
an answer as well as a number of affirmative defenses and counterclaims.
As described in "Information About the Merger - The Merger Agreement," upon
consummation of the Merger, each of Mehl and the Company will enter into a
full settlement and release with respect to the litigation and will dismiss
all claims against each other. Neither party will pay any money or other
consideration to the other in connection with such settlement and release.
Market For The Registrant's Common Equity And Related Stockholder Matters:
The Company's Common Stock and warrants have been traded over-the-counter
since December 6, 1983, and their bid prices are reported by the Nasdaq
market. The range of quoted bid prices is as follows:
COMMON STOCK WARRANTS*
PERIOD HIGH LOW HIGH LOW
QUARTER ENDED
FEBRUARY 28, 1996 2 7/8 1 3/16 1 1/2 3/8
QUARTER ENDED
NOVEMBER 30, 1995 1 15/16 3/16
QUARTER ENDED
AUGUST 31, 1995 7/32 3/16
YEAR ENDED MAY 31, 1995:
6/1/94 to 8/31/94 9/32 1/4
9/1/94 to 11/30/94 9/32 1/4
12/1/94 to 2/28/95 9/32 1/4
3/1/95 to 5/31/95 1/4 3/16
YEAR ENDED MAY 31, 1994:
6/1/93 to 8/31/93 3/8 5/16
9/1/93 to 11/30/93 13/32 11/32
12/1/93 to 2/28/94 3/8 1/4
3/1/94 to 5/31/94 9/32 1/4
<PAGE> 29
* Due to the decline of the market value of the common stock, there were no
available quoted bid prices for periods prior to the quarter ending February
29, 1996, based upon the assumption that warrants will not be exercised or
purchased for the periods presented.
On October 11, 1995 the date preceding the first public announcement of
negotiations concerning the Merger, the high and low bid prices of the
Company's Common Stock were $1 3/4 and $1 1/4 respectively.
The source for the price quotes of the Common Stock is as reported by the
National Association of Securities Dealers and does not include retail
markups, markdowns, commissions or other adjustments and does not represent
actual transactions.
As of April 17, 1996, there were approximately 3,900 holders of the
Registrant's common shares.
The Registrant has never paid any common stock cash dividends, and no common
stock dividends are anticipated at the present time.
Voting Securities and Principal Holders Thereof
Only stockholders of record at the close of business on April 17, 1996 will be
entitled to vote at the meeting. On April 17, 1996 there were 14,497,423
shares of Common Stock outstanding and entitled to vote at the meeting. There
were also outstanding 16,000 shares of Series A Preferred Stock and 10,500
shares of 1985 Series Preferred Stock. Shares of Series A Preferred Stock and
shares of 1985 Series Preferred Stock vote as a single class with the shares
of Common Stock on all matters. Each share of each class of stock is entitled
to one vote.
The following table sets forth the name and address, the number of shares
beneficially owned and percent of the class those shares represent for each
officer, director and person known by the Company to be the beneficial owner
of more than 5% of the outstanding Common Stock, Series A Preferred Stock or
1985 Series Preferred Stock as of April 17, 1996.
<PAGE> 30
Name and Address Shares
of Beneficial Beneficially Percent
Title of Class Owner Owned of Class
Common Stock Optivest Technologies Corp. 850,000 (1) 5.86%
151 East Main St.
Ramsey, NJ 07446
James J. Leonard 1,768,000 (2) 12.20%
151 East Main St.
Ramsey, NJ 07446
Allan Borkowski 1,003,651 (3) 6.92%
1 Horizon Road
Fort Lee, NJ 07024
Paul W. Hartloff, Jr. 151,000 (4) 1.04%
P.O. Box 1260
Santa Barbara, CA 93102
Donald Duberstein 687,000 (5) 4.74%
Joseph J. Saviano 411,266 2.84%
Stanley Youdelman 202,166 (6) 1.39%
Series A Dr. V.E. Athouse 1,000 6.25%
Preferred 393 Traverso Ave.
Stock Los Altos, CA 94022
William and Constance 1,000 6.25%
Celentana
2936 Harrison
Glenview, IL 60025
Chester and Joan Choi 1,000 6.25%
14 Paerdegat, 10th Street
Brooklyn, New York 11236
Delger-Fligelman 1,000 6.25%
8644 Darby Avenue
Northridge, CA 91325
<PAGE> 31
Name and Address Shares
of Beneficial Beneficially Percent
Title of Class Owner Owned of Class
Jack Forem 1,000 6.25%
34 Auerbach Avenue
Lawrence, New York 11559
William G. Lucas 1,000 6.25%
1125 Sunapee Road
West Hempstead, NY 11552
Julian Utevsky 1,000 6.25%
518 Main Street
Cedarhurst, NY 11516
Stanley Youdelman 2,000 12.50%
261R Old Mill Pass
James, NY 11780
1985 Series Susan Borkowski 1,000 9.52%
Preferred 5 Horizon Road
Stock Fort Lee, NJ 07024
Howard and Ethel Engleman 1,000 9.52%
41 Fifth Avenue
New York, NY 10003
John Hugunin, Trustee 1,000 9.52%
3255 Cliff Drive
Santa Barbara, CA 93103
Charles H. Jarvis 1,000 9.52%
P.O. Box 1260
Santa Barbara, CA 93102
Dr. M. Arthur Mirza 1,000 9.52%
290 East Main St.
Suite 700
Smithtown, NY 11787
P.P.D.G., Inc. 1,000 9.52%
1157 Willis Avenue
Albertson, NY 11507
Julian Utevsky 1,000 9.52%
518 Main Street
Cedarhurst, NY 11516
Paul W. Hartloff, Jr. 2,000 19.05%
P.O. Box 1260
Santa Barbara, CA 93102
<PAGE> 32
On April 17, 1996 all officers and directors of the Company, a group of six
persons, owned beneficially 4,213,083 shares which represent 29.1% of the
outstanding shares of Common Stock.
(1) Does not include shares held by Allan Borkowski who is Chief Executive
Officer and Chairman of Optivest Technologies Corp. ("Optivest").
(2) Includes 140,000 shares held by Mr. Leonard's two sons, in which he
disclaims any beneficial interest. Also includes 800,000 shares held by
Friedman, Manger & Co., Inc., of which company Mr. Leonard is a principal.
Does not include shares owned by Optivest, of which Mr. Leonard is President
and Director.
(3) Includes certain shares owned by Mr. Borkowski's family: (a) 115,500
shares of Common Stock, (b) 1,500 shares of Series A Preferred Stock
convertible into 24,000 shares of Common Stock and (c) 2,000 of 1985 Series
Preferred Stock convertible into 32,000 shares of Common Stock. Mr. Borkowski
disclaims any beneficial interest in the securities owned by his family. Does
not include shares owned by Optivest.
(4) Includes (a) 2,000 shares of 1985 Series Preferred Stock convertible into
32,000 shares of Common Stock and (b) 36,000 shares held by a trust in which
Mr. Hartloff had voting power but no other beneficial interest.
(5) Includes 76,500 shares of Common Stock owned by Mr. Duberstein's wife,
and 125,000 shares by his wife as trustee for their children under the New
York Uniform Gift to Minors Act.
(6) Includes 32,000 shares of Common Stock issuable upon the conversion of
Series A Preferred Stock. Does not include 24,000 shares of Common Stock and
500 shares of 1985 Series Preferred Stock held by Mr. Youdelman's spouse of
which Mr. Youdelman disclaims beneficial interest.
Ownership of Common Stock After the Merger
After the consummation of the Merger, each of Thomas L. Mehl Sr. and Nardo
Zaias will own 4,275,000 shares of Common Stock, representing for each such
person 14.49% of the total number of shares to be outstanding.
If certain milestones regarding the financing of two joint ventures proposed
to be undertaken by Classy Lady are met, the Company may issue a total of
10,000,000 additional shares of Selvac Common Stock to such Classy Lady
shareholders as may be designated in writing by the holders of a majority in
interest of the outstanding shares of Classy Lady. Assuming that each of
Messrs. Mehl and Zaias received one half of all such shares as may be issued,
each of them would own 9,275,000 shares of Common Stock, or 23.48% of the
total number of shares to be outstanding.
<PAGE> 33
Management's Discussion And Analysis Of Financial Condition And Results Of
Operation
Results of Operations
Quarter Ended February 29, 1996 Compared To Quarter Ended February 28, 1995
Sales for the nine months ended February 29, 1996 decreased $335,000 or 17% as
compared to the corresponding period of the previous year. This was due to a
decrease in sales volume resulting from lower orders of Finally Free products,
primarily in Canada, along with price reductions necessitated by increased
competition.
Sales for the three months ended February 29, 1996 increased $128,000 or 32%
as compared to the corresponding period of the previous year. This was
primarily due to increased sales volume in Japan.
Gross margin as a percentage of sales decreased by 2.4% and 5.7% respectively,
for the nine and three months ended February 29, 1996. Current year sales,
particularly those for the second and third fiscal quarters included a greater
percentage to markets where the Company has less favorable pricing
arrangements. Additionally, second quarter 1995 revenues included
approximately $43,000 of promotional sales of Finally Firm products sold at
little or no margin. The effect of these factors was offset to some degree by
improved vendor pricing and warehousing efficiency.
The Company continues to be dependent on the sales of one product, Finally
Free, which accounted for 96% of sales for the nine months ended February 29,
1996. Expiration of the Company's US Finally Free patents in 1996 is not
expected to have a significant impact on future operations. With further
price decreases and reduced sales volume for Finally Free anticipated in
future periods, the Company is continuing efforts to establish markets for
Finally Firm. In this regard, Finally Firm had been introduced as a test
market product in Taiwan. It is presently too early for management to draw
conclusions as to the results of this effort.
During the second quarter of the current fiscal year, the Company began
marketing efforts for Raywatch, a wrist or clip-on watch that contains
features which assist its wearer in measuring and monitoring exposure to ultra
violet light. The Company is presently a non-exclusive, U.S. retail
distributor for this product. Negotiations will be considered for expanded
distribution arrangements and markets based on evaluation of initial results.
Costs related to the initial marketing of this product through the third
fiscal quarter were $65,000 with additional costs of $35,000 expected during
fiscal 1996. Raywatch sales to date have not been significant.
<PAGE> 34
Selling, general and administrative expenses for the nine and three months
ended February 29, 1996, increased by $261,000 and $222,000 respectively, as
compared to the corresponding periods of the previous year. Increase
depreciation and amortization costs as a result of changes in the estimated
useful lives of certain intangible assets and equipment and the aforementioned
marketing costs related to the Raywatch product contributed to the increase.
In addition, legal, accounting and other professional fees for the nine and
three months ended February 29, 1996 increased by $81,000 and $85,000,
respectively. These increases were primarily attributed to costs related to
the Classy Lady merger. Bad debt expense for the nine months ended February
29, 1996, was approximately $70,000 higher than for the corresponding period
of the prior year, resulting form a reassessment of the collectability of an
accounts receivable balance from the Company's Australian distributor.
In January 1996, the Company received $172,000 insurance proceeds in
connection with the theft of certain inventory being carried at $99,000. The
amount by which the insurance proceeds exceed the carrying basis, has been
reflected as other income for the nine and three months ended February 29,
1996.
No provision for income tax recovery has been provided for the nine and three
months ended February 29, 1996, due to the uncertainty concerning the
Company's ability to utilize the future tax benefits of net operating losses
generated during this period. For the nine months ended February 28, 1995,
the Company recognized a recovery of income taxes of $55,000. A provision for
current income taxes of $100,000 for the period was offset by a reduction in
the Company's deferred tax asset valuation allowance. The valuation allowance
reduction was a result of a change in judgment whereby it was determined to be
more likely than not that the Company would be able to utilize a portion of
its net operating loss carryforwards.
Assuming consummation of the Classy Lady acquisition and related Laser
Industries joint venture, future direction of the Company's efforts will
include those related to the development and marketing of products which
exploit Classy Lady's licensed processes. Under the terms of the contract
between the Company and Classy Lady, management of Classy Lady and their
appointees are to comprise a majority of the Company's Board of Directors
subsequent to the acquisition. See "Information About the Merger."
Year Ended May 31, 1995 Compared To Year Ended May 31, 1994
For the year ended May 31, 1995, the Company realized a profit from continuing
operations of $144,000, $.01 per share as compared to a loss of $260,000, $.02
per share, for the previous year. This return to profitability was primarily
attributed to reduced selling, general and administrative costs in 1995 as a
result of efforts instituted by management and the absence of certain "non-
recurring costs" which had an impact on 1994 operations.
<PAGE> 35
For the year ended May 31, 1995 net sales were $2,745,000, a decrease of
$208,000 or 6% as compared to the prior year. Increased competition
necessitated price reductions which was the primary factor contributing to the
decrease in net sales. Despite the price reductions, cost of sales, as a
percentage of sales, was 57% for both 1995 and 1994. This is primarily a
result of improved vendor pricing, warehousing efficiency and product
diversification for the current fiscal year.
In fiscal 1994 the Company recorded a charge of $237,000 for write down of
inventories of products which had been discontinued or replaced and where it
was determined that existing inventories would be of limited value.
Additionally, as a result of a Massachusetts audit of the Company's Corporate
income tax returns for the years ended May 31, 1988, 1989, and 1990, the
Company was assessed $39,000 for underpayment of Massachusetts corporate income
tax and related interest of $27,000. These amounts, which represent the
entire balance due as a result of the audit, had been charged to operations in
1994. The tax assessment and related interest charge did not have a material
effect on the Company's financial condition.
Selling, general and administrative costs for the current fiscal year were
$213,000, or 16%, lower than those for the previous year. This decrease is
primarily a result of downsizing efforts which were completed in May, 1994.
Additionally, selling and administrative costs for 1994 included significant
costs required to protect the Company's intellectual property rights in its
Asian markets. Management does not anticipate significant costs of this nature
in the immediate future.
Interest income for fiscal 1995 was $127,000, an increase of $97,000 over the
previous year. This was primarily attributed to interest earned on the note
receivable from Roadrunner Video Enterprises, Inc. obtained from the sale of
the Video Knights assets.
The Company has continued to be dependent on foreign sales of one product,
Finally Free. Continuing efforts to establish markets for Finally Firm are
being pursued. Fiscal 1995 sales of Finally Firm units and related products
were $130,000, an increase of 20% from the prior year.
Liquidity And Capital Resources
Pending Merger:
The Company is presently dependent upon sales of one product in limited
markets. Efforts have been made to pursue investment opportunities which will
enable the Company to expand or diversify its market. In this regard, on
October 11, 1995, the Company signed a non-binding letter of intent and
pursuant to the Merger Agreement, agreed to acquire Classy Lady. Under the
terms of the Merger Agreement, Classy Lady will be merged into and with a
wholly owned subsidiary of the Company. In exchange for all of their stock in
Classy Lady, its former stockholders will receive 15,000,000 shares of the
Company's common stock. In addition, certain of the former shareholders of
Classy Lady will be entitled to earn-out incentives allowing them to receive
up to 10,000,000 additional common shares contingent (contingent shares) upon
achieving designated milestones for the organization and financing of joint
ventures for the development of laser hair removal systems. As of March 29,
1996, Classy Lady had accomplished the first of these milestones entitling
certain of its former shareholders to 2,000,000 of the contingent shares,
assuming consummation of the Merger. It is substantially likely that the
second milestone triggering the issuance of an additional 3,000,000 shares
will be met shortly after consummation of the Merger.
<PAGE> 36
Classy Lady, which prior to January 1996 was not an operating entity, owns
exclusive license rights to certain multiple hair removal and laser hair
removal processes for which patents have been obtained or are presently
pending. Classy Lady and LIL have signed an agreement to form JV Corp., a
corporate joint venture that will develop and market laser hair removal
systems. See "Information about Classy Lady-Business-Joint Venture." Under
the terms of the contract, Classy Lady will not be required to contribute
financial resources to JV Corp. Additionally, Classy Lady will not be
required to guarantee any obligations of JV Corp., including the fees payable
to LIL.
Assuming consummation of the Merger, Classy Lady's investment in JV Corp. will
be accounted for applying the Equity Method. JV Corp. will be obligated to
pay to LIL the sum of $100,000 per month for certain administrative and other
services provided by LIL for a period of three years. JV Corp. is not
expected to be profitable in its initial year of operations. In accordance
with the provisions of Account Principles Board Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock, Classy Lady shall not
provide for losses by JV Corp. that are in excess of Classy Lady's investment.
Costs directly associated with the Merger are not expected to have a
significant impact on the Company's cash flow. The need for additional
resources is expected in order to develop and market products which exploit
the Classy Lady processes. The Company intends to use its current cash funds
and future funds derived from operations, note receivable collections and/or
stock issuance upon the exercise of warrants in order to fund costs relevant
to the development and marketing of the Classy Lady processes. Assuming
consummation of the Merger, management anticipates the need for additional
funds of $5,000,000 to launch the first phase of deployment of the Classy Lady
processes. In this regard, on April 18, 1996, the Company completed a private
placement sale of 8% Convertible Debentures (the "Debentures") which resulted
in gross proceeds to the Company of $3,000,000. The Debentures bear interest
at the interest rate of 8% per annum and mature on March 31, 1997. The
Debentures are convertible in whole or in part into shares of Selvac Common
Stock at the conversion rate of 80% of the fair market value of the Selvac
Common Stock at the time of conversion, based upon the average closing bid
price of Selvac Common Stock on the five trading days preceding such
conversion. In consideration for services performed as brokers in connection
with the foregoing private placement, the Company agreed to issue an aggregate
of 90,000 shares of Common Stock to two individuals, neither of whom are
otherwise affiliated with the Company or Classy Lady in any respect. In the
event that the Debentures are not converted into Common Stock prior to
maturity, the Company intends to raise funds necessary to satisfy the
repayment of the Debentures through a private or public equity offering or, if
possible, to renegotiate the terms of payment with the holders of the
Debentures. It is further expected that additional funds will be raised
through a private or public equity offering within the next six months to one
year.
<PAGE> 37
Classy Lady's operations are not expected to generate revenues for the next
six months. Monthly overhead for these operations during its initial six to
ten months is anticipated at $100,000 to $125,000. As of March 29, 1996,
$500,000 in aggregate, had been advanced by the Company to Classy Lady to fund
its operations.
Current Year Liquidity Matters:
For the nine months ended February 29, 1996, the Company's cash balance
increased $211,000. Funds provided by operations, the exercise of warrants and
stock options, and note payments received from CDF Acquisition Corp. (CDF)
were used to advance funds to Classy Lady in anticipation of the pending
merger.
In June 1995, the Company renegotiated the repayment terms of its note
receivable from CDF. Under the terms of the original agreement, the entire
principal plus accrued interest, at the prime rate, was payable in May 1996.
Under the terms of the new agreement, in June 1995, the Company received
$112,500 in cash and 200,000 shares of its own common stock valued at $37,500
as payment towards the CDF note receivable. In December 1995, the Company
received an additional payment of $59,000 ($50,000 principal and $9,000
interest). The remaining principal and accrued interest balances are to be
paid on an installment basis through June 1998. Interest on the unpaid
principal balance is at 9% through June 1996 and 7% thereafter.
In July 1995, Roadrunner Video Enterprises, Inc. was acquired by Roadrunner
Video Group, Inc. (collectively referred to as "Roadrunner"), formerly known
as Business Data Group, a publicly traded entity. In satisfaction of
Roadrunner's $750,000 note payable to the Company, Roadrunner issued 75,000
shares of $10 par value, 12% preferred stock to the Company. Each share of
preferred stock is convertible into 10 shares of Roadrunner common stock
through June 2000.
Although the preferred stock is a restricted security (not registered for
public trading) Roadrunner is obligated to register, for public sale, a
sufficient number of common shares to satisfy conversion rights attached to
the preferred shares. Management of Roadrunner anticipates the completion of
such registration by the second quarter of calendar year 1996. When and if
the registration has been completed, intentions are to evaluate the merit of
retaining all or part of the preferred stock.
In December 1995, the Company agreed to accept 24,368 shares of Roadrunner
restricted common stock in payment of $41,000 preferred stock dividends. The
Company also received registration rights with this stock and anticipates that
it too will be registered for public sale by the second quarter of calendar
year 1996.
<PAGE> 38
In December 1995, the Company filed a post-effective amendment to Form S-1
with the Securities and Exchange Commission, to register for public sale,
881,218 shares of its common stock, issuable at $1.25 per share, upon the
exercise of outstanding common stock purchase warrants.
As of February 29, 1996, the Company had issued 146,000 shares of common stock
upon the exercise of stock purchase warrants. In addition, in September 1995,
the Company issued 75,000 shares of its common stock at $.41 per share upon
the exercise of nonqualified stock options. Proceeds from the issuance of
common stock pertaining to the warrants and stock options, net of costs
related to the aforementioned registration, was $209,000. There can be no
assurance that all or any of the remaining warrant holders will exercise their
rights under the warrants.
The Company does not expect any significant capital expenditures associated
with its Finally Free or Finally Firm products in the immediate future.
However, the Company anticipates approximately $35,000 of additional
expenditures related to marketing for Raywatch products for the remainder of
the current fiscal year. Treasury stock acquisitions are not anticipated in
the near future
The FASB has issued SFAS No. 121 "Accounting for impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" and SFAS No. 123
"Accounting for Stock Based Compensation". The Company has determined that
the implementation of these accounting standards will not have a significant
impact on its financial statements.
INFORMATION ABOUT CLASSY LADY
Business
Classy Lady is a company incorporated in 1994 under the laws of the
Commonwealth of Puerto Rico. Classy Lady is a development stage company and
was formed to exploit the hair removal technologies patented by two of its
principals, Mr. Thomas H. Mehl, Sr. and Dr. Nardo Zaias. To date, Classy Lady
has not conducted any substantial business operations, has not marketed or
sold any products, and its sole activities have consisted of obtaining the
licensing and joint venture rights described below. The assets of Classy Lady
consist principally of the exclusive licensing rights granted to Classy Lady
by Mr. Mehl for a multiple hair removal technology and by Dr. Zaias for a
laser hair removal technology.
<PAGE> 39
License Agreements
In December 1995, Classy Lady entered into a License Agreement with Thomas L.
Mehl, Sr. (the "Mehl License") pursuant to which Mr. Mehl granted to Classy
Lady an exclusive license to make, use and sell the following products.
a method and system for the removal of multiple hairs invented by Mr. Mehl
represented by U.S. Patent No. 5,470,332 dated November 28, 1995 (the
"Mehl Patent");
a consumer radio frequency hair removal tweezer device invented by Mr. Mehl
and represented by U.S. Patent No. 5,049,149 dated November 17, 1991; and
a consumer hair removal conductive solution to be used to provide for
improved conductivity when used in conjunction with the tweezer device
which was invented by Mr. Mehl and is represented by U.S. Patent No.
5,364,394 on November 15, 1994.
The Mehl Patent is directed to devices for multiple hair removal using
electric current. The Mehl Patent describes several embodiments, including a
multi-layer device. The multi-layer device is comprised of a non-conductive
adhesive wax layer, a structural layer, and a conductive adhesive layer
between the non-conductive and structural layers. In use, the device is
pressed against the skin surface with the non-conductive layer in contact with
the skin. Hair to be removed extends through the non-conductive layer and
contacts the conductive layer. The conductive layer is connected to a power
source, which is turned on for a predetermined time period. The hairs serve
as paths by which power is transmitted to the root areas of the hairs, which
are thereby damaged. The non-conductive layer protects the skin from shocks
and burns when the device is in use. The adhesive layers adhere to the
treated hairs to thereafter facilitate their removal from the skin.
The hair removal system licensed by Classy Lady from Thomas L. Mehl, Sr. has
also received patent protection in the European Community and a Canadian
patent for such system has been granted in February 1996. These patent rights
are also exclusively licensed by Classy Lady together with the U.S. patents
described above. Patent applications for Classy Lady's licensed multiple hair
removal products are pending in approximately 50 additional foreign countries.
Regulatory approval to market the electronic components employed by the Classy
Lady hair removal system licensed from Mr. Mehl was granted in September 1993
by the Verband Deutscher Electrotechniker ("VDE") which enables such products
to be marketed and sold in the European Community. Classy Lady believes that
no further VDE or other regulatory approvals are required in the European
Community to market the Classy Lady tweezers, comb or patch products which are
used with such electronic components. Accordingly, Classy Lady believes it
can currently market its multiple hair removal products in the European
Community under its existing VDE license.
<PAGE> 40
In consideration for the grant of the exclusive license, Classy Lady agreed to
pay Mehl a royalty of 5% of the wholesale price of all products covered by the
above patents sold by Classy Lady or its distributors worldwide. Under the
Mehl License, Classy Lady agreed to pay Mehl a minimum annual royalty of
$50,000. 10% of all royalty payments are to be made to Classy Lady's patent
law firm of Schlesinger, Arkwright & Garvey ("SA&G") until the aggregate of
such payment to SA&G reaches $1 million.
In December 1995, Classy Lady also entered into a License Agreement with Dr.
Nardo Zaias (the "Zaias License") pursuant to which Dr. Zaias granted to
Classy Lady an exclusive license to make, use and sell products incorporating
the laser method of hair removal invented by Dr. Zaias and which is
represented by U.S. Patent No. 5,059,192 dated October 22, 1991 (the "Zaias
Patent").
The Zaias Patent is directed to a method of hair depilation using a laser to
substantially destroy hair follicles. The method uses a pulse of laser energy
of a wavelength that is readily absorbed by melanin, a pigmentation found in
the papilla at the base of the hair follicle. The laser energy is applied
vertically over the hair follicle opening, and has a radiant exposure dose of
sufficient energy and duration to damage the papilla to prevent hair regrowth
while avoiding scarring surrounding skin.
Classy Lady has been advised by its FDA regulatory advisors that the laser
hair removal technology licensed by Classy Lady employs the use of medical
lasers which are substantially equivalent to devices which have received
clearance for marketing by the FDA. Accordingly, the FDA only requires that
Classy Lady submit a 510(k) "Premarket Notification" at least 90 days prior to
the intended marketing date for the laser technology. Classy Lady has noted
that a similar 510(k) filing by Thermolase Corporation received pre-market
clearance from the FDA on April 3, 1995. There can be no assurance that pre-
market clearance will be granted on a timely basis, if at all, from the FDA.
Classy Lady has been advised by its FDA regulatory advisors that the Classy
Lady laser technology is substantially equivalent to the Thermolase laser
technology.
In consideration for granting the exclusive license, Classy Lady agreed to
issue to Dr. Zaias 5,000 shares of Classy Lady Common Stock, pay to Dr. Zaias
$100,000 prior to June 3, 1996 and pay to Dr. Zaias a royalty of 5% on all
revenues derived by the Classy Lady in connection with the laser hair removal
invention covered by the above patent. Classy Lady also agreed to pay to Dr.
Zaias a minimum royalty of $50,000 per year.
Mr. Mehl and Dr. Zaias have each agreed to share with the other a portion of
the royalty revenues derived from the License Agreements described above.
Accordingly, 25% of all payments to be made to Mr. Mehl under his license
agreement are to be paid to Nardo Zaias until such time as Dr. Zaias notifies
Classy Lady that Mehl is no longer obligated to make such payments and 50% of
all royalty payments due to Dr. Zaias are to be paid to Mr. Mehl.
<PAGE> 41
Plan of Operations
Classy Lady intends to commercialize the hair removal technologies licensed
from Dr. Zaias and Mr. Mehl both directly and through joint ventures with
strategic partners. In December 1995, Classy Lady executed a Joint Venture
Agreement with Laser Industries, Limited ("LIL"), a publicly held Israeli
corporation engaging in developing and marketing commercial laser technology
applications, to develop the Classy Lady laser hair removal technology. See
"Joint Venture."
The development of Classy Lady's hair removal technologies are subject to a
number of risks and uncertainties, including but not limited to the following:
need for substantial amounts of capital to accomplish its plan of operations,
dependence of outside sources to provide such capital and the uncertainty of
obtaining it on attractive terms, if at all; need for joint venture partners
to develop and market its hair removal technologies; requirement to obtain
510(k) pre-market approval from the FDA before marketing in the U.S. and the
need to meet regulatory requirements of foreign countries; the risks of
competing with companies with substantially greater resources; and the general
risks and uncertainties associated with new product development and marketing.
In addition, while Classy Lady believes that that the patents underlying its
technologies provide it with strong protection in the marketplace, there can
be no assurance that lengthy and expensive proceedings alleging infringement
of third party intellectual property rights would not be successfully brought
which would negatively impact Classy Lady's ability to market its products.
In connection with developing the laser hair removal technology, Classy Lady
intends to identify 100 of the leading dermatologists and plastic surgeons in
the United States. The initial 100 doctors will be granted the right to
deploy the laser hair removal technology. In return, the Company will share
in the gross revenues derived from laser hair removal treatment. Classy Lady
intends to provide the doctor with (1) a laser hair removal system, including
a maintenance program, (2) initial training for both the doctors and their
technicians, and (3) initial advertising. The initial advertising will be
targeted toward the doctors' local market and then on a national basis if
commercially feasible.
To date, the initial organizational and administrative expenses incurred by
Classy Lady have been funded by borrowings in the aggregate sum of $500,000,
borrowed from the Company pursuant to three month promissory notes bearing
interest at 6% per annum. There presently exists sufficient working cash
within Classy Lady to carry the operating expenses for the next two months.
Classy Lady anticipates that funding the commercialization of products and
services derived from the Mehl License and the Zaias License will require
substantial additional capital. Expenses associated with the deployment of
the Company's technology will include research and development, new patent
applications, patent maintenance fees, acquisition of initial lasers, initial
training for both the doctors and their technicians and initial advertising.
It is anticipated that Classy Lady will expend approximately $1,000,000 in the
area of research and development (including both consumer and professional
hair removal) over the next twelve months, but as already discussed, this will
be funded through the raising of additional capital. Classy Lady expects to
seek such funding from joint venture partners, such as the arrangement
described below with LIL and through the sale of additional equity or debt
securities. The future availability and terms of equity and debt financing
and of collaborative arrangements with industry partners cannot be predicted.
The unavailability or inadequacy of financing to meet future capital needs
could force Classy Lady to modify, curtail, delay or suspend some or all
aspects of its planned operations.
Classy Lady will be adding minimally to the existing staff during the next
year. A director of marketing will be brought on to assist with the
deployment of the Company's technologies and one to two will be added to the
clerical staff.
<PAGE> 42
Joint Venture
On December 19, 1995, Classy Lady executed a Joint Venture Formation Agreement
with LIL. Under the terms of this agreement, Classy Lady and LIL agreed to
form a new corporation ("JV Corp.") to be owned 50% by Classy Lady and 50% by
LIL. The purpose of the joint venture is to obtain FDA approval for the
marketing of laser hair removal invention covered by the Zaias Patent and to
use its best efforts to develop, market and sell products and services derived
therefrom. Classy Lady will contribute a sublicense of the Zaias License to
JV Corp. and agreed that it will issue no more than one other sublicense of
the Zaias License. LIL will execute a three year promissory note to JV Corp.
in the amount of $3,500,000 bearing interest at the rate of 5.65% per annum.
LIL agreed to carry out, on behalf of JV Corp., the following activities: (i)
research, development and engineering activities aimed at developing,
manufacturing, marketing and selling FDA approved laser hair removal products
and services (the "Application"); (ii) the preparation of a market study
aimed at developing and sales strategy for the Application; and (iii)
assisting JV Corp. in all regulatory activities including the application to
the FDA, within eight months after formation of JV Corp., for clearance of the
Application.
In consideration for performing such activities, LIL will be entitled to
reimbursement of out-of-pocket expenses, as well as internal costs determined
on a basis consistent with the cost allocation principles used by LIL for
internal budgeting purposes. Under the agreement, for a period of 36 months
(or such shorter period as LIL shall determine), LIL agreed to perform certain
managerial, consulting and administrative functions and activities on behalf
of JV Corp. for which it shall be paid a monthly fee of $100,000, plus
reimbursement of out-of-pocket expenses. LIL shall be entitled to offset the
amounts due to LIL from JV Corp. against any amounts owing to JV Corp. by LIL
under the $3,500,000 promissory note.
Under the agreement, LIL agreed to advance to Dr. Nardo Zaias the sum of
$100,000. Such amounts are to be treated as a shareholder advance, bearing
interest at the rate of 5.65% per year and are to be repaid upon consummation
of a private placement or public offering or such earlier time as JV Corp.
shall have sufficient capital to repay such advance or advances.
Under the terms of sublicense to be granted by Classy Lady to JV Corp., JV
Corp. will pay to Dr. Nardo Zaias a royalty payment of 1.5% of the net sales
derived from the retail sales of products and services based on applications
of the Zaias Patent.
A majority of the JV Corp.'s Board of Directors are to be designated by LIL,
and LIL will have full authority over the business operations of JV Corp.
<PAGE> 43
Directors and Officers of Classy Lady
The directors of Classy Lady are as follows:
Name Age Position with the Company
Thomas L. Mehl, Sr. 57 President, Chairman of the Board
AnneMarie Mehl 54 Secretary
Dr. Nardo Zaias 64 Treasurer
All of the persons listed above have held their positions in Classy Lady since
December 1995.
Thomas L. Mehl, Sr. has been a successful inventor and entrepreneur in the
health and beauty field for the past thirty years. From January 1991 to the
present, Mr. Mehl has been working on filing for new patents in the United
States and abroad for several inventions in the health and beauty field. In
the field of hair depilation for the consumer, Mr. Mehl was granted three
patents which have been licensed exclusively to Classy Lady and has additional
patent applications in the field of hair depilation pending.
From March 1991 to 1993, Mr. Mehl was the principal of His or Her Products by
Mehl, Inc., a private Florida corporation started by Mr. Mehl to assist him in
the research and development of his new technology in the skincare field.
From January 1992 to 1994, Mr. Mehl was the principal of Classy Lady by Mehl,
Inc., a private Florida corporation started by Mr. Mehl to assist him in the
research and development of his consumer hair removal technology. From
February 1993 to the present, Mr. Mehl has been President and Chairman of
M.C.M. Group, Inc., a private Florida corporation, which works primarily with
inventors and entrepreneurs in the area of marketing, consulting and
manufacturing of new technology and products. From November 1993 to the
present, Mr. Mehl has been President and Chairman of His or Her Products by
Mehl of Puerto Rico, Inc., a private Puerto Rico corporation, which has
developed and is marketing a hand-held steam facial product.
Nardo Zaias, M.D. is a well-known dermatologist specializing in diseases of
the skin and skin cancer. From 1991 to the present, Dr. Zaias has maintained
a private medical practice at the Greater Miami Skin & Laser Center located in
Miami Beach, Florida. Dr. Zaias has published over fifty research papers to
his credit including his report on "Hair Root Damage with Mehl Method of
Depilation". Dr. Zaias is also the inventor of a patented laser hair
depilation invention, United States Patent No. 5,059,192 issued on October 11,
1991, which was exclusively to Classy Lady.
<PAGE> 44
AnneMarie Mehl is wife of Thomas L. Mehl, Sr. and has twenty years of
experience in both the professional and consumer hair depilation fields
working with Mr. Mehl's patented hair removal method and products. Mrs. Mehl
worked with Mr. Mehl in their chain of beauty salons located within Britts
Department Stores from 1965-1974, served from 1977 to 1981 as an officer of
NU-Trolysis Inc. which originally manufactured and marketed Mr. Mehl's
original professional hair removal products, and served from 1983 to 1985 as
an officer of Mehl International, Inc. which developed the permanent hair
removal device. From 1991 to 1994, Mrs. Mehl worked closely with both Mr.
Mehl and Dr. Zaias in testing the new consumer hair removal products. From
1994 to the present, Mrs. Mehl has continued her ongoing product testing with
Mr. Mehl and Dr. Zaias on behalf of Classy Lady.
Voting Securities and Principal Holders Thereof
The following table sets forth the name and address, the number of shares of
Common Stock beneficially owned and percent those shares represent for each
officer, director and 5% or greater stockholder of Classy Lady as of April 17,
1996:
Name and Address Shares Beneficially Percent
Owned
Thomas L. Mehl, Sr. 4,275 28.5%
and AnneMarie Mehl
_ M.C.M. Group, Inc.
4020 Newberry Road
Gainesville, FL
Nardo Zaias 4,275 28.5%
Mount Sinai Hospital
4302 Alton Road
Miami Beach, FL 33140
Pichit Suvanprakorn 4,275 28.5%
Biophile Corporation:
888/41-48 Mahatun Plaza
Ploenchit Road
Bangkok 10330, Thailand
<PAGE> 45
FINANCIAL STATEMENTS
Set forth below are the consolidated financial statements of the Company for
the nine months ended February 29, 1996 (unaudited) and the year ended May 31,
1995 (audited).
<PAGE> 46
SELVAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
FEBRUARY 29, 1996
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 844,975
Accounts receivable, net of allowance for doubtful
accounts of $95,125 590,628
Finished goods inventories 502,284
Current portion of Note receivable, CDF Acquisition Corp. 102,250
Other current assets 41,042
Total current assets 2,081,179
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $706,896 40,503
PATENTS AND PATENT RIGHTS, net of accumulated amortization
of $847,725 113,430
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, net
of accumulated amortization of $194,550 28,294
NOTES RECEIVABLE, net of current portion:
CDF Acquisition Corp. 147,948
Classy Lady by Mehl of Puerto Rico, Inc. 300,000
OTHER ASSETS
Investment in non-marketable securities 750,000
Marketable securities, available for sale 45,080
Other 6,960
$ 3,513,394
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 181,793
Accrued expenses 50,613
Other current liabilities 22,800
Total current liabilities 255,206
COMMITMENTS AND CONTINGENCIES (Notes 2 and 3)
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value,
authorized-200,000 shares:
Series A, 12% cumulative convertible;
Issued and outstanding-17,000 shares 170,000
1985 Series, 12% cumulative convertible;
Issued and outstanding-16,500 shares 165,000
Common stock, $.01 par value, 20,000,000 shares
authorized, 16,717,485 shares issued 167,175
Additional paid-in capital 9,168,638
Accumulated deficit (5,460,681)
Unrealized gain - marketable securities 3,655
4,213,787
Treasury stock, at cost, 2,474,959 common shares (955,599)
Total stockholders' 3,258,188
$ 3,513,394
See notes to condensed consolidated financial statements.
<PAGE> 47
SELVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
REVENUES:
Net sales $1,596,312 $ 1,931,659
Franchise revenue, net of related costs 0 5,577
1,596,312 1,937,236
COST OF SALES 950,698 1,110,414
GROSS MARGIN 645,614 826,822
OPERATING EXPENSES:
Selling, general and administrative 935,183 674,069
Loss on sale of property and equipment 0 20,361
935,183 694,430
(289,569) 132,392
OTHER INCOME:
Investment income 87,767 95,330
Other (Note 9) 72,728 0
INCOME (LOSS) BEFORE INCOME TAXES (129,074) 227,722
RECOVERY OF INCOME TAXES 0 55,114
NET INCOME (LOSS) $ (129,074) $ 282,836
NET INCOME (LOSS) PER COMMON SHARE (Note 8) $ (.01) $ .02
INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (159,224) $ 239,186
WEIGHTED AVERAGED NUMBER OF COMMON SHARES
OUTSTANDING DURING PERIOD 13,937,595 14,457,937
See notes to condensed consolidated financial statements.
<PAGE> 48
SELVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
REVENUES:
Net sales $ 530,210 $ 402,491
COST OF SALES 325,069 223,966
GROSS MARGIN 205,141 178,525
OPERATING EXPENSES:
Selling, general and administrative 423,117 200,658
Loss on sale of property and equipment 0 10,260
423,117 210,918
(217,976) (32,393)
OTHER INCOME:
Investment income 55,422 34,930
Other (Note 9) 72,728 0
NET INCOME (LOSS) $ (89,826) $ 2,537
NET LOSS PER COMMON SHARE (Note 8) $ (.01) $ .00
LOSS APPLICABLE TO COMMON STOCK $ (99,876) $ (12,013)
WEIGHTED AVERAGED NUMBER OF COMMON SHARES
OUTSTANDING DURING PERIOD 14,114,735 14,251,043
See notes to condensed consolidated financial statements.
<PAGE> 49
SELVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(129,074) $ 282,836
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss on sale of equipment 0 20,361
Depreciation and amortization 193,831 125,564
Deferred tax recovery 0 (55,114)
Marketable securities received as payment of
preferred stock dividends (41,425) 0
Changes in operating assets and liabilities:
Accounts receivable 40,969 112,108
Inventories 33,671 (415,735)
Other operating assets (17,197) (2,894)
Accounts payable 97,572 (9,328)
Accrued expenses (7,850) (47,717)
Net cash provided by operating activities 170,497 10,081
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations 0 350,000
Notes receivable repayments 171,500 61,300
Increase in notes receivable (300,000) 0
Property and equipment acquisitions (580) (11,856)
Other 0 5,819
Net cash provided (used) by investing
activities (129,080) 405,263
CASH FLOWS FROM FINANCING ACTIVITIES:
Note repayment 0 (140,000)
Preferred stock dividends (36,900) (42,000)
Proceeds from issuance of common stock, net of
registration costs 209,250 0
Treasury stock acquisitions (2,301) (187,260)
Net cash provided (used) by financing
activities 170,049 (369,260)
CASH USED BY DISCONTINUED OPERATIONS 0 (142,330)
INCREASE (DECREASE) IN CASH FOR THE PERIOD 211,466 (96,246)
CASH, beginning of period 633,509 337,863
CASH, end of period $ 844,975 $ 241,617
See notes to condensed consolidated financial statements.
<PAGE> 50
SELVAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Marketable securities received in payment of:
Accounts receivable $ 0 $ 35,984
Preferred stock dividends $ 41,425
Receipt of non-marketable securities as payment of
note receivable $750,000
Receipt of stock into treasury in payment of note
receivable $ 37,500
Conversion of preferred stock into common stock $150,000
See notes to condensed consolidated financial statements.
<PAGE> 51
SELVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine and three
months ended February 29, 1996 are not necessarily indicative of the results
that may be expected for the year ending May 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended May 31, 1995.
The 1995 financial statements presented have been reclassified to conform
with the 1996 presentation.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the 1995 Selvac Corporation and
Subsidiaries Annual Report on form 10-KSB for the year ended May 31, 1995.
2. CONTINGENCIES:
Since January 1990, the Company has been engaged in an ongoing dispute
with the United States Food and Drug Administration (FDA) regarding the
marketing status for Finally Free Hair Remover for personal (non-professional)
use. In June 1991, the Company agreed not to manufacture, process, pack,
label, promote, advertise, distribute, or sell Finally Free Hair Remover
unless it received marketing authorization from the FDA. Subsequently, the
Company received approval to export this product to Canada.
In July 1994, the FDA determined that Finally Free shall be considered a
Class III device under the Food, Drug and Cosmetic Act and accordingly, will
require premarket approval before it is sold, manufactured or distributed in
the U.S. Management is evaluating alternatives for the Company to satisfy FDA
regulatory requirements with minimal incremental cost.
As of February 29, 1996 the carrying value of intangible assets relating
to the Domestic Finally Free product, consisting primarily of patents, is
$74,000.
<PAGE> 52
SELVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. PENDING MERGER:
In October 1995, the Company signed a non-binding letter of intent and
pursuant to an agreement dated January 1, 1996 (as amended and restated on
February 15, 1996) entered into a contract to acquire Classy Lady by Mehl of
Puerto Rico, Inc. (CLM), a privately held corporation. Under the terms of the
contract, CLM will be merged into and with a wholly owned subsidiary of the
Company. In exchange for all of their stock in CLM, its former stockholders
will receive 15M shares of the Company's common stock. In addition, certain
of the former shareholders of CLM will be entitled to earn-out incentives
allowing them to receive up to 10M additional common shares contingent
(contingent shares) upon achieving designated milestones for the organization
and financing of joint ventures for the development of laser hair removal
systems. As of February 29, 1996, CLM had accomplished the first of these
milestones entitling certain of its former shareholders to 2M of the
contingent shares, assuming consummation of the merger.
It is expected that events required to satisfy the conditions for the
issuance of an additional 3M shares will be accomplished shortly after
consummation of the merger.
CLM, which prior to January 1996 was not an operating entity, owns
exclusive license rights to certain multiple hair removal and laser hair
removal processes for which patents have been obtained or are presently
pending. CLM and Laser Industries LTD, (Laser Industries) a publicly held
corporation, have signed an agreement to form a joint venture that will
develop and market laser hair removal systems. Under the terms of the
contract, CLM will not be required to contribute financial resources to this
joint venture.
4. INCOME TAXES:
The Company recognized an increase in its deferred tax asset valuation
allowance of approximately $40,000 and $57,000 respectively, for the three and
nine months ended February 29, 1996.
For the nine months ended February 28, 1995, the Company recognized a
reduction in its deferred tax asset valuation allowance of approximately
$155,000.
5. NOTES RECEIVABLE:
CDF Acquisition Corp.
In June 1995, the Company renegotiated its note receivable from CDF
Acquisition Corp. Under the terms of the new agreement, the remaining
principal balance of $150,000 at February 29, 1996, is to be paid in
installments of $50,000 in December 1996, 1997 and June 1998. Interest on the
unamortized principal balance, at 9% through June 1996 and 7% thereafter, is
payable with each principal installment. Interest accrued prior to the
refinancing, is payable at $50,000 in December 1996 and $47,948 in December
1997.
<PAGE> 53
SELVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Classy Lady by Mehl of Puerto Rico
During the quarterly period ended February 29, 1996, in contemplation of
the merger discussed in Note 3, the Company advanced $300,000 to Classy Lady.
The advances are evidenced by promissory notes which bear interest at 6%. At
February 29, 1996, the outstanding principal balance under these notes was
payable on various dates from March 7, 1996 through April 30, 1996.
On March 28, 1996, the above notes receivable from Classy Lady along with
notes issued in March 1996 for $200,000 in aggregate, were consolidated into a
$500,000 note payable, on June 26, 1996, with interest at 6%.
6. CHANGE IN ACCOUNTING ESTIMATE:
Effective September 1, 1995, the Company reduced the estimated useful
lives used in calculating depreciation and amortization of certain intangible
assets and equipment. Estimated useful lives of certain molds used in the
production of the Company's principal product lines have been reduced in
anticipation of discontinuance of specific product designs prior to the date
originally anticipated. The estimated useful life of the excess of cost over
the fair value of assets acquired from the Company's acquisition of Mehl
International Corporation in 1985 have been reduced based on expectations that
the use of certain trademarks and trade names will be discontinued at an
earlier date than originally foreseen. The effected assets will continue to
be depreciated using the straight line method over the estimated remaining
useful lives, as adjusted.
Depreciation and amortization expense included in selling, general and
administrative expenses was approximately $65,000 and $38,000 higher for the
nine and three months ended February 29, 1996, respectively, than that which
would have been calculated prior to the change in accounting estimate. As a
result, loss before income taxes was increased by $65,000 and $38,000 for the
nine and three months ended February 29, 1996, respectively. In addition, net
loss per common share for the three months ended February 29, 1996 increased
by $.01. Loss per common share for the nine months ended February 29, 1996 was
not effected.
<PAGE> 54
SELVAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following reflects those assets effected by the change in
accounting estimate:
Original Adjusted
Estimated Estimated
Useful Useful
Cost Life Life
Production molds, included in
machinery and equipment:
Finally Free $146,000 5 years 3 years
Finally Firm 63,000 5 years 2.25 years
Excess of cost over fair value
of assets acquired $ 73,000 40 years 11 years
7. INVESTMENT IN MARKETABLE AND NON-MARKETABLE SECURITIES:
In July 1995, the Company received 75,000 shares of $10 par value, 12%
cumulative preferred stock of Roadrunner Video Group, Inc. (Roadrunner), in
satisfaction of a $750,000 note payable by Roadrunner to the Company. The
Roadrunner preferred stock is a restricted security (not registered for public
sale), each preferred share is convertible into 10 shares of Roadrunner common
stock.
In December 1995, the Company accepted 24,368 shares of Roadrunner
restricted common stock valued at $41,425 as payment of Roadrunner preferred
stock dividend. The securities are classified as "available for sale
securities" and reported at fair value. An unrealized gain of $3,655 has been
charged to stockholders' equity during the period.
The terms of contractual agreements between Roadrunner and the Company,
require that Roadrunner register, for public sale, the aforementioned 24,368
restricted common shares and a sufficient number of common shares to satisfy
the Company's preferred stock conversion rights. The closing bid quotation
for Roadrunner common stock on February 29, 1996 was $1.875.
8. EARNINGS PER SHARE:
The weighted average number of common shares outstanding during the
periods has been used in the calculation of earnings per share. The exercise
of common stock warrants and conversion of convertible securities would have
an antidilutive effect on earnings per share and therefore, they have not been
considered in earnings per share calculations.
9. OTHER INCOME:
In January 1996, the Company received insurance proceeds of $172,000 in
connection with the theft of certain inventory being carried at $99,000. The
difference between the insurance proceeds and the carrying value of the
inventory, has been recorded as other income.
<PAGE> 55
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
of Selvac Corporation:
We have audited the accompanying consolidated balance sheet of Selvac
Corporation and subsidiary as of May 31, 1995, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows, for
each of the years in the two year period ended May 31, 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 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 financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Companies as of May 31, 1995,
and results of their operations and their cash flows for each of the years in
the two year period ended May 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, on June 28,
1991, the Company entered into a consent decree with the Food and Drug
Administration (FDA). The Company has agreed not to manufacture, process,
advertise or distribute its principal product within the United States unless
and until premarket approval as a Class III device under the Food, Drug and
Cosmetic Act, has been received from the FDA. The Company has begun to
explore its options in this regard. However, there can be no assurance that
action will be taken concerning premarket approval and that if they are, they
will be successful. Accordingly, the accompanying consolidated financial
statements do not reflect any adjustments which may result upon resolution of
this matter.
Bond, Andiola & Company
Raritan, New Jersey
July 13, 1995
<PAGE> 56
SELVAC CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MAY 31, 1995
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 633,509
Accounts receivable, net of allowance for doubtful
accounts of $229,941 631,597
Inventories 535,955
Notes receivable, current portion 200,000
Other current assets 36,581
Total current assets 2,037,642
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $633,241 113,578
PATENTS AND PATENT RIGHTS, net of accumulated amortization
of $793,631 167,524
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, net of
accumulated amortization of $143,211 79,633
NOTES RECEIVABLE, net of current portion:
Related parties 245,833
Other 750,000
OTHER ASSETS 22,332
$ 3,416,542
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 84,221
Accrued expenses 58,813
Other current liabilities 22,450
Total current liabilities 165,484
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value, authorized-200,000
shares:
Series A, 12% cumulative convertible;
Issued and outstanding-24,000 shares 240,000
1985 Series, 12% cumulative convertible;
Issued and outstanding-24,500 shares 245,000
Common stock, $.01 par value, authorized-20,000,000 shares:
Issued shares-16,256,485 162,565
Additional paid-in capital 8,813,998
Accumulated deficit (5,294,707)
4,166,856
Treasury stock, at cost, 2,263,359 common shares (915,798)
Total stockholders' equity 3,251,058
$ 3,416,542
See notes to consolidated financial statements.
<PAGE> 57
SELVAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,
1995 1994
REVENUES:
Net sales $ 2,744,620 $ 2,922,400
Franchise income, net of related costs
$2,813 in 1994 0 30,220
2,744,620 2,952,620
COST OF SALES 1,562,898 1,666,132
GROSS MARGIN 1,181,722 1,286,488
OPERATING EXPENSES:
Selling, general and administrative 1,087,462 1,302,011
Charge for inventory write downs 0 237,178
Loss on sale of property and equipment 20,361 0
Loss on sale of marketable securities 7,822 0
1,115,645 1,539,189
66,077 (252,701)
INTEREST INCOME 126,537 29,460
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 192,614 (223,241)
PROVISION FOR INCOME TAXES 48,386 36,794
INCOME (LOSS) FROM CONTINUING OPERATIONS 144,228 (260,035)
DISCONTINUED OPERATIONS:
Operating loss 0 (580,209)
Loss on disposal, including provision of
$100,000 for operating losses during
phase-out period and net of recovery of
income taxes of $12,500 0 (1,084,721)
Net loss from discontinued operations 0 (1,664,930)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 144,228 (1,924,965)
CHANGE IN ACCOUNTING PRINCIPLE - cumulative
effect to June 1, 1993 of application of
Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" 0 35,886
NET INCOME (LOSS) $ 144,228 $(1,889,079)
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ .01 $ (.02)
Discontinued operations .00 (.11)
NET INCOME (LOSS) $ .01 $ (.13)
INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 86,028 $(1,947,279)
See notes to consolidated financial statements.
<PAGE> 58
SELVAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL TREASURY
PREFERRED STOCK STOCK ISSUED PAID-IN ACCUMULATED STOCK
SERIES A 1985 SERIES SHARES AMOUNT CAPITAL DEFICIT AT COST
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended May 31, 1994:
Balance, May 31, 1993 $240,000 $245,000 16,256,485 $162,565 $8,813,998 $(3,433,456) $(418,749)
Cash dividends on preferred
stock:
Series A (28,800)
1985 Series (29,400)
Purchase of treasury stock (268,469)
Net loss (1,889,079)
Balance, end of year 240,000 245,000 16,256,485 162,565 8,813,998 (5,380,735) (687,218)
Year ended May 31, 1995:
Cash dividends on preferred
stock:
Series A (28,800)
1985 Series (29,400)
Purchase of treasury stock (228,580)
Net income 144,228
Balance, end of year $240,000 $245,000 16,256,485 $162,565 $8,813,998 $(5,294,707) $(915,798)
See notes to consolidated financial statements.
</TABLE>
<PAGE> 59
SELVAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 144,228 $(260,035)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Loss on sale of property and equipment 20,361 0
Loss on sale of marketable securities 7,822 0
Depreciation and amortization 172,104 251,378
Deferred taxes 48,386 (44,886)
Charge for inventory write downs 0 237,178
Provision for bad debts 163,660 122,793
Changes in operating assets and liabilities:
Accounts receivable 123,362 13,172
Inventories (103,904) (97,015)
Other operating assets 50,448 25,951
Accounts payable (365,882) 60,613
Accrued expenses (88,430) 71,291
Other operating liabilities 2,400 7,800
Net cash provided by operating activities 174,555 388,240
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations 350,000 0
Proceeds from sale of property and equipment 6,900 0
Proceeds from sale of marketable securities 29,256 0
Property and equipment acquisitions (11,856) (62,500)
Notes receivable repayments 319,300 1,339
Net cash provided (used) by investing
activities 693,600 (61,161)
CASH USED BY FINANCING ACTIVITIES:
Note repayment (140,000) 0
Preferred stock dividends (58,200) (58,200)
Treasury stock acquisitions (228,580) (268,469)
Net cash used by financing activities (426,780) (326,669)
CASH USED BY DISCONTINUED OPERATIONS (145,727) (263,962)
INCREASE (DECREASE) IN CASH FOR THE YEAR 295,648 (263,552)
CASH, beginning of year 337,861 601,413
CASH, end of year $ 633,509 $ 337,861
See notes to consolidated financial statements.
<PAGE> 60
SELVAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31,
1995 1994
SUPPLEMENTAL SCHEDULES OF NON-CASH ACTIVITIES:
Marketable securities received in payment
of accounts receivable $ 35,984 $ 0
Proceeds on sale of discontinued operations
financed by the Company $ 0 $1,410,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Payments during the year for:
Income taxes $ 0 $ 39,124
Interest $ 0 $ 27,178
CASH FLOWS FROM DISCONTINUED OPERATIONS ARE
COMPRISED AS FOLLOWS:
Cash provided (used) by:
Operating activities $ (145,727) $ (242,201)
Investing activities 0 (161,761)
Financing activities 0 140,000
$ (145,727) $( 263,962)
See notes to consolidated financial statements.
<PAGE> 61
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business of Company:
Selvac Corporation (the Company) is engaged in the sale and distribution of
appliances and machines utilizing a patented hair removal system. Until May
31, 1994 Video Knights, Inc. (VKI), its wholly owned subsidiary, had owned and
operated unique concept-based home entertainment centers which rented and sold
videotapes, laser discs, video games and audio books. Additionally, VKI is
authorized to sell Franchises in several Mid-Atlantic states. As disclosed in
Note 4, substantially all operations of Video Knights, Inc. were discontinued
effective June 1, 1994.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Video Knights, Inc. All material intercompany
balances and transactions have been eliminated.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment:
Property and equipment are recorded at cost. The Company uses the straight
line method of providing for depreciation and amortization for financial
reporting purposes and accelerated methods for tax purposes. Repair and
maintenance expenditures are charged to income as incurred.
Patents and Patent Rights:
The patents and patent rights are recorded at cost and are amortized on the
straight-line method over their remaining lives, at the date of acquisition,
which vary from six to seventeen years.
Excess of Cost Over Fair Value of Assets Acquired:
The excess of the cost over the fair value of net assets at the date of
acquisition of acquired businesses is being amortized on the straight-line
method over a periods ranging from ten to forty years.
Deferred Franchise Costs:
Deferred franchise costs are recorded at cost and amortized on the straight
line method over a period of ten years.
Income Taxes:
In accordance with FASB 109, deferred income taxes are recorded to reflect the
tax consequences on future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end.
The tax benefit related to operating loss and tax credit carryforwards are
recognized if management believes, based on available evidence, that it is
more likely than not that they will be realized.
<PAGE> 62
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents include money
market funds and other liquid investments maturing within 90 days of the
balance sheet date.
Concentration of Credit Risk:
During the normal course of business, the Company maintains cash balances in
excess of FDIC insurance coverage limits. At May 31, 1995 cash funds in
excess of such insurance coverage limits were $236,000. The Company has not
experienced any losses related to these investments.
At May 31, 1995 four separate wholesale customers accounted for 36%, 26%, 16%
and 10% respectively of the Company's total accounts receivable balance.
Although the Company does not require collateral, and payment terms offered in
certain circumstances by the Company are for periods in excess of those
general provided typical business situations, reserves for potential credit
losses are maintained and such losses have been within management's
expectations.
2. CONTINGENCIES:
Litigation:
Since January 1990, the Company has been engaged in an ongoing dispute with
the United States Food and Drug Administrative (FDA) regarding the marketing
status of Finally Free Hair Remover for personal (non-professional) use.
On June 28, 1991, the United States District Court for the Eastern District of
Pennsylvania approved a settlement agreement between the Company and FDA.
Pursuant to the settlement agreement, the Company denied the allegations of
the complaint but agreed, among other things, that the Company would not
manufacture, process, pack, label, promote, advertise, distribute, or sell
Finally Free Hair Remover unless and until it received marketing authorization
from FDA. On December 6, 1991, FDA requested that the Company provide
additional information for its 510(k) filing as a part of the marketing
authorization process.
In February 1992, the Company received approval from the FDA, to export
Finally Free Hair Remover to Canada. Since this date, the Company has
modified inventories of this product which was manufactured for sale in U.S.
markets to enable them to be sold internationally. The carrying value of
intangibles, principally patents relating to the domestic Finally Free product
as of May 31, 1995, is $167,000.
In July 1994, the FDA determined that Finally Free shall be considered a Class
III device under the Food, Drug and Cosmetic Act and accordingly, will require
premarket approval before it is sold, manufactured or distributed in the U.S.
Discussions have taken place between management and a major U.S. Corporation
in the personal care appliance industry concerning the pursuit of required FDA
approval in this regard. These discussions are in their preliminary stage and
there can be no certainty that such actions will be taken, or if they are,
that they will be successful.
<PAGE> 63
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. CONTINGENCIES: (Continued)
Litigation: (Continued)
In March 1991, the Company initiated an action relating to several ongoing
royalty issues with the licenser of its radio frequency epilation technology
whereby the licenser has asserted the Company underpaid its obligations under
certain royalty agreements. The Company's counsel believes that a favorable
outcome is likely. The action is pending in Federal District Court, Boston,
Massachusetts.
Insurance Claim:
On April 20, 1995 the Company filed a $172,800 claim with its insurance
company in connection with the alleged theft of Finally Free inventory from a
bonded warehouse. At May 31, 1995, merchandise subject to this claim is
carried in inventory at $99,000.
3. CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES:
For the year ended May 31, 1994 the Company adopted the asset and liability
method of accounting for income taxes as required by Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109 (FASB
109), "Accounting for Income Taxes" which is effective for years beginning
after December 15, 1992. Prior years' financial statements have not been
restated. The cumulative effect of the accounting change increased net income
for the year ended May 31, 1994 by $35,886. The effect on earnings per common
share was less than $.01.
The Company previously used the deferred method of accounting for income
taxes.
4. DISCONTINUED OPERATIONS:
Effective at the close of business on May 31, 1994, the Company sold
substantially all of the assets of VKI (the Business) to Roadrunner Video
Enterprises, Inc. (Roadrunner) for $350,000 cash and $1,060,000 in promissory
notes. The operating results of the Business have been reported as
"discontinued operations" and include:
1994
Net Sales $1,732,403
Loss before income tax $ (580,209)
Net operating loss $ (580,209)
Included in the calculation of the loss on disposal of the business are cost
associated with disposal of the Business of $100,000, professional fees
related to the sale of $20,000 and a write down for declines in value of
intangible assets directly attributed to the disposition of $167,000.
The sales price had been contingent upon average per store gross revenues (for
each of the five video retail locations sold) during the year ended September
30, 1995 being within a specified range. During the year ended May 31, 1995,
in consideration of the Company granting Roadrunner an extension of time for
making principal payments, Roadrunner has agreed to waive the sales contract
price contingency.
<PAGE> 64
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES:
At May 31, 1995, inventories consist entirely of personal care appliance
finished goods.
6. PROPERTY AND EQUIPMENT:
Property and equipment is comprised as follows:
ESTIMATED USEFUL
LIFE IN YEARS
Machinery and equipment $ 677,257 3 - 7
Furniture and fixtures 69,562 7
746,819
Less: Accumulated depreciation
and amortization (633,241)
$ 113,578
Depreciation and amortization of property and equipment was $93,534 in 1995
and $497,890 ($166,540 - continuing operations and $331,350 - discontinued
operations) in 1994.
7. ACCRUED EXPENSES:
Accrued expenses consist of the following:
Professional fees $ 11,333
Severance 10,000
Royalties 30,022
Other 7,458
$ 58,813
8. STOCKHOLDERS' EQUITY:
Preferred Stock:
$10 Par Value Series A
12% Cumulative Convertible Preferred Stock
Each share of Series A stock can be converted into 16 shares of common stock
by the holder thereof. At any time, the Company may redeem these shares at
par, plus any unpaid dividends, and the holders may convert to common shares
within 30 days of notice of redemption. The dividends are payable
semiannually.
<PAGE> 65
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY: (Continued)
$10 Par Value 1985 Series
12% Cumulative Convertible Preferred Stock
The Company sold 75 units at a price of $10,000 per unit. Each unit consists
of 1,000 shares of $10 par value 1985 Series, 12% cumulative preferred stock
(each share convertible into 16 shares of common stock) and three-year
warrants to purchase 16,000 shares of common stock at $1 per share. All the
warrants have been exercised. At any time, the Company may redeem these
preferred shares at par, plus any unpaid dividends, and the holders may
convert to common shares within 30 days of notice of redemption. The
dividends are payable semiannually.
Common Stock:
As of May 31, 1995, warrants to purchase 881,218 common shares of $1.25 per
share were outstanding. The expiration date of these common stock warrants,
as extended, is December 7, 1996.
The Company has reserved 1,732,218 shares of common stock for conversion of
preferred stock, warrants and stock option plan.
Stock Options:
Under the terms of the Company's stock option plan, incentive options to
purchase common shares may be granted to employees at a price to be fixed by
the Board of Directors or Stock Option Committee, but not less than the fair
value on the date of grant (110% of fair value if the optionee owns or would
own 10% of the outstanding shares if the options were exercised).
Nonqualified options may be granted at prices less than fair value. Incentive
options have a duration of seven years from the date granted.
QUALIFIED NONQUALIFIED
Year granted 1985-1988 1983-1989
Option price per share $.41 - $1.44 $.41 - $1.44
Year Ended May 31, 1994:
Balance outstanding, beginning of year 270,000 75,000
Options canceled and expired (270,000) 0
Balance outstanding, end of year 0 75,000
Year Ended May 31, 1995:
Options canceled and expired 0
Balance outstanding and excercisable,
end of year 0 75,000
<PAGE> 66
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES RECEIVABLE:
Notes receivable are comprised as follows:
Note receivable, CDF Acquisition Corp. (CDF), principal
balance of $350,000 plus accrued interest of $95,833 (1) $ 445,833
Notes receivable Roadrunner, collateralized by the
VKI assets sold (Note 4):
Due in quarterly installments of $62,500 plus
interest at prime plus 1%, through June 1998 (2) 750,000
Other unsecured interest free demand note 40,500
1,236,333
Less current portion 200,000
1,036,333
Less allowance for bad debt 40,500
$ 995,833
(1) A current director of the Company and a former officer and director are
stockholders in CDF. The note receivable from CDF was obtained as
consideration when the Company sold the stock of its former wholly owned
subsidiary Beauty Resources, Inc. (BRI) to CDF in May 1991. In June 1995, the
note was renegotiated and the Company received $112,500 in cash and 200,000
shares of its own common stock, valued at $37,500, which are to be applied
towards the outstanding principal balance. Under the new agreement, the
remaining outstanding principal balance is payable in four installments of
$50,000 in December 1995, 1996, 1997 and June 1998. Accrued interest of
$95,833 at May 31, 1995, plus additional interest at 9% through June and 7%
thereafter is payable at $50,000 in December 1996 with the remaining
outstanding balance due in December 1997. The note receivable has been
classified under the terms of the new agreement on the May 31, 1995 balance
sheet.
(2) Under the terms of a contractual agreement between VKI and Roadrunner, VKI
has the option to exchange the Roadrunner note for a specified equity position
in Roadrunner, should Roadrunner's stock become registered for public trading
or should Roadrunner become a subsidiary of a publicly traded corporation.
Under the terms of the agreement, in such circumstances, Roadrunner shall be
obligated to register, for public trading, any common shares issued to VKI.
Additionally, Roadrunner is obligated to register for public trading
sufficient common shares to be reserved for issuance to VKI in satisfaction of
any conversion rights attached to senior equity securities issued to VKI. In
June 1995, Roadrunner signed a letter of intent whereby Roadrunner is to be
acquired as a wholly owned subsidiary of a publicly traded Company. A July
1995 closing is anticipated. Should this acquisition be consummated
management's intention is to exercise VKI's Option. The note receivable from
Roadrunner has been classified as a non-current asset on the Company's May 31,
1995 balance sheet.
<PAGE> 67
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS:
Royalties:
The Company has entered into agreements which provide for royalty payments
based on a percentage of net sales or units sold of its principal products.
Royalty expense under the agreements for fiscal years ended May 31, 1995 and
1994 was $101,000 and $89,000, respectively.
Operating Leases:
The Company leases office, retail sales and warehouse facilities and equipment
under non-cancelable operating leases, ranging from six months to ten years.
Renewal options included in retail sales facilities leases range from three to
seven years.
Under the terms of the agreement between the Company and Roadrunner (Note 4),
the Company has agreed to assign to Roadrunner all of its tenants rights under
the lease agreements for facilities used in its discontinued operations. At
May 31, 1995, assignment to Roadrunner of primary responsibility for
fulfilling the leasing obligation had been approved by landlords for two of
the leases. While negotiations are underway toward obtaining approval of such
assignment by the other various landlords, Roadrunner is leasing these
premises on a month-to-month basis from the Company. No amounts have been
provided for in the loss on discontinued operations for future rents due under
these leases.
Future annual minimum lease payments under non-cancelable operating leases in
effect at May 31, 1995, including those assigned to Roadrunner, are:
Year Ending May 31,
1996 $ 349,181
1997 357,833
1998 248,541
1999 251,079
2000 258,060
Thereafter 362,680
$1,827,374
Facilities rent expense for the years ended May 31, 1995 and 1994, was $76,947
and $522,023 ($69,617 - continuing operations and $452,406 - discontinued
operations) respectively, including rent to Optivest (Note 14).
11. NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share is computed based on net income (loss) for
the period after providing for preferred stock dividend requirements. The
number of shares used in the computation is the weighted average number of
common shares and, when their effect would be dilutive, common equivalent
shares outstanding during the period. Weighted average number of shares
during the periods are 14,345,234 in 1995 and 15,189,614 in 1994.
<PAGE> 68
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
For the year ended May 31, 1994 as a result of a Massachusetts tax audit, the
Company was assessed additional Massachusetts corporate income taxes of
$39,124 and related interest of $27,178 for the fiscal years ending May 31,
1988, 1989 and 1990. These amounts have been included in the statement of
operations for the year ended May 31, 1994.
The components of the provision for income taxes from continuing
operations are as follows:
YEAR ENDED MAY 31,
1995 1994
Current:
Federal $ 0 $ 0
State 0 36,794
$ 0 $36,794
Deferred:
Federal $34,000 $ 0
State 14,386 0
$48,386 $ $ 0
The following is a summary of the tax effects of the significant temporary
differences which comprise the Company's deferred tax asset at May 31, 1995:
Bad debt reserve $ 116,290
Depreciation 12,000
Amortization of intangibles (88,320)
Tax credit carryforwards 66,000
Loss carryforwards 1,518,940
Other 39,240
Valuation allowance (1,664,150)
Total Asset $ 0
As of May 31, 1995, the Company had federal net operating losses (NOL) and
tax credit carryforwards, for income tax purposes, available as follows:
INVESTMENT RESEARCH AND
FISCAL YEAR OF FEDERAL TAX DEVELOPMENT
EXPIRATION NOL CREDITS TAX CREDITS
1997-2001 $ 0 $ 81,000 $ 21,000
2006 2,150,000 0 0
2007 238,000 0 0
2008 105,000 0 0
2009 1,286,000 0 0
$3,779,000 $ 81,000 $ 21,000
Tax credits are subject to a statutory reduction of up to 35% in accordance
with Tax Reform Act of 1986.
<PAGE> 69
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES: (Continued)
The net operating losses may generate tax benefits of $1,518,940 which has been
offset by a valuation allowance because of the uncertainty of ultimate
realization. The Company's total valuation allowance decreased by $97,800
during the year ended May 31, 1995 principally due to the current year use of
net operating losses. The aggregate valuation allowance increased by $816,000
during the year ended May 31, 1994 principally due to additional net operating
losses.
A reconciliation of the statutory U.S. Federal income tax rate and the
effective income tax rate for the years ended May 31, 1995 and 1994 is as
follows:
1995 1994
Statutory Federal income tax rate 34.0% (34.0%)
Increases (decreases) resulting from:
State income taxes, net of Federal tax benefit 4.9 10.9
Amortization of intangible assets 12.5 25.3
Non-deductible life insurance expense 3.0 3.3
Increase (decrease) in federal deferred
tax valuation allowance (32.0) 13.4
Other 2.7 (2.4)
Effective tax rate 25.1% 16.5%
13. SALES TO SIGNIFICANT CUSTOMERS AND EXPORT SALES:
For the year ended May 31, 1995 and 1994, the Company had sales to two major
international customers accounting for 86% and 93% of consolidated net sales
from continuing operations, respectively. One of these customers accounted for
76% and 68% of net sales in 1995 and 1994, respectively.
Consolidated sales from continuing operations in 1995 and 1994 were to foreign
customers comprised as follows:
1995 1994
Foreign Sales:
Japan $2,089,842 $1,845,757
Spain 271,304 411,676
Other Foreign Sales 371,557 639,250
Total Foreign Sales 2,732,703 2,896,683
Domestic Sales 11,917 25,717
$2,744,620 $2,922,400
All foreign sales with the exception of sales to Canada, which accounted for
6.7% and 3.9% of consolidated sales for 1995 and 1994 respectively, are
denominated in U.S. dollars. Any substantial decrease in sales to the
Company's distributor in Japan could have a severe detrimental impact on
the Company's operations and financial condition.
14. RELATED PARTY TRANSACTIONS:
At May 31, 1994, 850,000 shares (6.1% of the Company's outstanding common
stock) were owned by Optivest Technologies Corp. Additionally, several
officers and directors of the Company are also officers and directors of
Optivest. During the year ended May 31, 1995, the Company repaid $140,000
borrowed from Optivest in fiscal 1994 under a promissory note agreement.
<PAGE> 70
SELVAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. RELATED PARTY TRANSACTIONS: : (Continued)
Additionally, the Company had leased a retail sales facility and leases an
administrative facility from Optivest, on a month-to-month basis, and Optivest
is the lessee in the lease agreement for one of the rental facilities used by
the Company in its discontinued operations (Note 4). Rent to Optivest for use
of administrative facilities was $30,000 for 1995 and 1994. Rent expense under
the lease agreement in which Optivest is the lessee, was $151,000 in 1994.
Interest income on the CDF note receivable (Note 9) was $25,000 in 1995 and
$21,000 in 1994.
<PAGE> 71
STOCKHOLDER PROPOSALS
A proposal submitted by a stockholder for action at the Company's next Annual
Meeting must be received at 221 Boston Post Road, Marlboro, Massachusetts
01752 no later than March 31, 1997 in order to be eligible for inclusion in
the Company's proxy statement for that meeting.
GENERAL
The Board of Directors is not aware of any other matters to be brought before
the meeting, but in the event that other matters are presented, the persons
named in the Board proxy will vote upon such matters in their discretion.
Representatives of the Company's accountants will be available by telephone
conference call at the Special Meeting. Such persons will have the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
The Company's Annual Report on Form 10-KSB of the Securities and Exchange
Commission will be provided without charge to stockholders upon written
request to the Company at 221 Boston Post Road, Marlboro, MA 01752.
<PAGE> 72
SELVAC CORPORATION
Proxy For Special Meeting of Stockholders
To Be Held On June 4, 1996
Solicited On Behalf Of The Board of Directors
The undersigned constitutes and appoints Allan Borkowski and James J. Leonard,
and each of them, as attorneys-in-fact and proxies of the undersigned with
full power of substitution, for and in the name, place and stead of the
undersigned, to appear at the Special Meeting of Stockholders of Selvac
Corporation (the "Company") to be held on the 4th day of June, 1996, and at
any postponement or adjournment thereof, and to vote all of the shares of
Common Stock of the Company which the undersigned is entitled to vote, with
all the powers and authority the undersigned would possess if personally
present. The undersigned hereby revokes any and all proxies heretofore given
with respect to such meeting. The undersigned hereby directs that this proxy
be voted as follows:
The Board of Directors recommend a vote FOR the approval of both proposals to
amend the Company's Certificate of Incorporation.
PROPOSAL 1. Amend the Certificate of Incorporation to change the name of
the Company to Mehl/Biophile International, Inc. upon effectiveness of the
merger between Selvac Acquisition Corp. and Classy Lady by Mehl of Puerto
Rico, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 2. Amend the Certificate of Incorporation to authorize 60,000,000
shares of Common Stock. A vote "For" Proposal 2 is a vote with respect to the
merger of Selvac Acquisition Corp. and Classy Lady by Mehl of Puerto Rico,
Inc. which will result in a change of control of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby authorizes the individuals set forth above to vote this
proxy for approval of any proposal to adjourn or postpone the Special Meeting
to solicit additional votes for the Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This Proxy is also voted to transact such other business as may properly come
before the meeting.
<PAGE> 73
THIS PROXY WILL, WHEN PROPERLY EXECUTED, BE VOTED AS DIRECTED. IF NO
DIRECTIONS TO THE CONTRARY ARE INDICATED HEREON AS PROVIDED, THE PERSONS NAMED
HEREIN INTEND TO VOTE FOR THE PROPOSALS SET FORTH ABOVE.
THIS PROXY CONFERS CERTAIN DISCRETIONARY AUTHORITY DESCRIBED IN THE PROXY
STATEMENT. THE APPOINTED ATTORNEYS-IN-FACT AN PROXIES PRESENT AT SAID MEETING
(OR IF ONLY ONE SHALL BE PRESENT, THEN THAT ONE) MAY EXERCISE ALL OF THE
POWERS HEREUNDER.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE PROXY STATEMENT DATED APRIL
__, 1996.
Dated ________________________, 1996
________________________________________
(Stockholder's Signature)
________________________________________
(Stockholder's Signature)
Please sign your name or names
exactly as it appears hereon,
including any official position
or representative capacity.
