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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) For the fiscal year ended: June 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 (NO FEE REQUIRED) For the transition period from ________ to ________.
Commission file number 33-12613-NY
CELESTIAL VENTURES CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 22-2814206
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
382 Route 59, Section 310, Monsey, New York 10952
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 369-0132
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, no par value None
Preferred Stock, no par value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant has: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant July 3, 1996, based on the average bid and
asked price on such date, was approximately $3,470,844.
Number of shares of Common Stock outstanding as of July 3, 1996: 1,126,186.
Number of shares of Preferred Stock outstanding as of July 3, 1996: 271,853.
(adjusted to reflect a 15 for 1 reverse stock split, effective May 3, 1996)
No annual reports to security holders, proxy or information statements, or
prospectuses filed pursuant. Rule 424(b) or (c) have been incorporated by
reference in this report.
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When used in this Annual Report on Form 10-KSB, the words "estimate",
"project", "intend", "expect" and similar expressions are intended to identify
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements are subject to risks and uncertainties that could cause the
Company's actual results and financial position to differ materially. Such
factors are described in detail elsewhere under "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
PART I
Item I. Business
Celestial Ventures Corporation, a Nevada corporation (the "Company"),
was incorporated on January 28, 1987. The Company's initial business was the
acquisition of real estate and real estate development. Since 1993, the Company
has primarily been engaged in the acquisition of businesses, divisions of
businesses or the assets of businesses that the Company's management identified
as having significant potential for business success. The Company is no longer
involved in real estate investment or development.
Valve Company Acquisitions
Pursuant to an Agreement and Plan of Reorganization dated August 12,
1993, the Company acquired all of the issued and outstanding common stock of
Valves International, Inc. ("VII"), an Oklahoma corporation, in exchange for
850,000 shares of the Company's restricted common stock. As a result of this
reorganization, the Company also acquired Central Valve Services, Inc., Alloy
Valves International, Inc., Valves International, Inc., and CVC International,
Inc., which were wholly owned subsidiaries of VII. VII and its subsidiaries
were operating companies engaged in the business of valve manufacturing and
sales in both Oklahoma and Texas.
Powder Coating Operations
On October 31, 1993, the Company acquired U.S. Powder Coaters, Inc., a
corporation whose principal business consisted of treating and coating metal
and non-metal materials, in exchange for 300,000 shares of the Company's common
stock. In 1993 the Company also acquired Gulf Coast Powder Coatings, Inc. As
part of the Company's reorganization, the Company discontinued operations of
U.S. Powder Coatings, Inc. in June 1994 and management renegotiated a 50%
reduction of its debt related to its acquisition.
Disposition of Valve and Powder Coating Operations
On August 31, 1995, effective as of April 30, 1995, the Company
entered into a purchase agreement whereby it sold all of its wholly owned
subsidiaries with the exception of U.S. Powder Coatings, Inc. to Turkey DeLite
International, Inc., a Nevada Corporation, (d/b/a ATCO Corporation)
("Purchaser" or "Turkey DeLite") for $1,900,000 in cash, promissory notes and
common stock. Turkey DeLite's principal executive officer, Mr. Bob J. Sudderth,
also served as the Chairman of the Board of Directors of the Company. See
"Certain Relationships and Related Transactions". The subsidiaries referred to
herein include Valves International, Inc., Central Valve Services, Inc., Alloy
Valve International, Inc. and Gulf Coast Powder Coatings, Inc. The sales price
consisted of a combination of 1,550,000 shares of the Purchaser's common stock,
a $200,000 promissory note due and the payment of $150,000 contingent upon the
successful completion of a stock offering by the Purchaser. The assets of
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U.S. Powder Coatings, Inc. are still owned by the Company although the
subsidiary is inactive.
Direct Mail Business Acquisitions
On August 29, 1995, the Company purchased, effective as of July 1,
1995, all of the issued and outstanding common stock of Success Direct, Inc., a
New Jersey corporation, a mail order business products company ("Success"), for
total consideration of 1,000,000 restricted shares of common stock of the
Company. The principal stockholder of Success, Mr. Irwin Schneidmill, became
the President of the Company on August 1, 1995. 415,000 of such shares were
paid to Mr. Irwin Schneidmill who was the 41.5% owner of the capital stock of
Success. See "Certain Relationships and Related Transactions."
Simultaneously with the acquisition of Success, Success assigned to
the Company its rights under an agreement to purchase certain business assets
form Re-Prod, Inc., including the name "Remarkable Products", and the Company
consummated the transaction with Re-Prod, Inc. The assets purchased from
Re-Prod, Inc. are related to the direct mail industry. See "Certain
Relationships and Related Transactions".
In connection with the acquisition of certain assets of Re-Prod, Inc.,
the Company paid total consideration consisting of the following; (i) $315,000
in cash, (ii) a promissory note in the amount of $250,000 payment of which was
guaranteed by Mr. Schneidmill and Mr. John Formicola, a shareholder of the
Company, and (iii) 750,000 shares of the common stock of the Company as to
which Mr. Schneidmill and Mr. Formicola have agreed to pay the difference
between the actual and estimated market price of the shares on a future date.
See "Certain Relationships and Related Transactions".
From August to December, 1995, the Company operated Success as a
wholly owned subsidiary under the tradename Remarkable Products. On December 7,
1995, Success changed its corporate name to Remarkable Office Products, Inc.
("Remarkable"), but has continued to use the tradename Remarkable Products.
Remarkable was incorporated in the State of New Jersey in September, 1994 and
from its inception through its acquisition by the Company in 1995 has been
engaged in the distribution of office products.
The Company, through its wholly-owned subsidiary, Remarkable, sells
specialized office products featuring time management and organizational tools
to small and medium-sized businesses nationwide through innovative, aggressive
direct marketing catalogs and programs. Remarkable's products include dry erase
boards and calendars with markers which can be wiped clean after use and
re-used. The Company also specializes in calendars and laminated products such
as large geographic wall maps, and federal law posters which many businesses
are required to post in the workplace (e.g., minimum wage posters, equal
opportunity and sexual harassment notices). The Company's strategy includes
mailings of a variety of distinctive, full color catalogs, a high level of
customer service, prompt order fulfillment, and discounted prices.
Industry Background
It is management's belief that distribution within the office products
industry is highly fragmented. End users traditionally have purchased office
products from commercial office supply companies and small retail dealers.
These distribution channels account for the vast majority of the market for
office products. The Company believes that direct marketing companies and
office products superstores have increased their share of the office products
market over the last several years.
Commercial office supply companies, often referred to as contract
stationers, traditionally have
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served large businesses through commissioned sales forces. Contract stationers
are able to purchase in large quantities directly from manufacturers and offer
significant volume-related discounts to their large business customers. Because
contract stationers use commissioned sales forces and volume related programs
to market products, it generally is impracticable for them to service small and
medium-sized businesses.
The independent retail channel, through which Remarkable's targeted
customers traditionally have purchased specialized office products, is
characterized by a large number of small retail dealers who primarily purchase
products from wholesalers for resale at or near manufacturers' list prices.
These small retail dealers typically stock a limited inventory of office
products, furniture and business machines.
In the past few years, alternative distribution channels such as
office products superstores and direct marketing companies have captured
increasing market shares at the expense of traditional retail office products
dealers. These superstores have emerged in most urban and suburban markets of
the United States targeting home office buyers and the small and medium-sized
businesses that purchase from retail dealers, by offering substantially lower
prices. Superstores generally operate on a cash and carry basis, charge extra
for delivery, and often require a nominal form of membership to obtain the best
pricing and to gain access to other limited services.
The Company believes that direct marketing has gained acceptance over
the past several years in many industries, including the office products
industry. Direct marketers of office products utilize a variety of catalogs and
other programs to market general office supplies, furniture and equipment at
discounts form manufacturers' list prices. Large direct marketing companies
typically purchase in large quantities, directly from manufacturers, and
operate from centralized distribution facilities. These larger direct marketers
develop large, proprietary customer databases that are segmented and used to
improve the effectiveness of catalog mailings to their customers.
Business Strategy
The Company believes that, properly executed, direct marketing
provides the most convenient and cost effective way for small and medium-sized
businesses to purchase certain office products, such as the time management and
organizational tools sold by Remarkable. Remarkable also believes that a high
level of customer service, aggressive product merchandising, fast delivery, and
ease and convenience in purchasing will become increasingly important
competitive factors, as competition increases from office products superstores.
Remarkable's strategy to distinguish itself from other direct marketers of
specialized office products, and from the low price, low service superstores,
is to provide small to medium-sized businesses with a high level of customer
service and a convenient, fast and economical means of purchasing a
comprehensive selection of specialized office products. Remarkable does not
compete in the highly competitive area of general office supplies which include
paper, writing instruments, desk accessories or office furniture because of the
small potential profit margin and the substantial competition in this area.
The Company believes that the most important elements of Remarkable's
business strategy are:
Direct Marketing. Remarkable markets directly to its existing
and prospective customers through frequent catalog mailings of a variety of
distinctive, strategically planned catalogs and specialty solo mailings.
Remarkable uses state of the art information systems to analyze the results of
each mailing, and to refine and segment its customer database and mailing
lists. The Company believes these procedures enable Remarkable to target future
mailings in a manner designed to enhance profitability and customer response
while lowering overall marketing costs.
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Customer Service. Remarkable emphasizes a high level of
customer relations. Remarkable attempts to make catalog shopping as convenient
and easy as possible by providing friendly, courteous order entry and customer
service representatives; "no questions asked", 30 day return policy, and 30 day
open account billing.
Prompt Order Fulfillment. Remarkable ships over 95% of all
orders on the day received. Remarkable estimates that substantially all orders
(other than custom printed items) are received by the customer within five
business days of the order date.
Merchandising. The Company believes that the majority of
Remarkable's sales are made at prices which are discounted from other
manufacturers' list prices. Remarkable updates its product selection to meet
the needs of its customers and continually evaluates the sales and profit
performance of each product through its state of the art information systems.
Catalog Publication
Remarkable uses its various catalogs to market directly to both
existing and prospective customers. Each catalog is printed in full color with
an effective selling presentation, including a picture of each item and a
narrative description that emphasizes key product benefits and features. The
catalogs are created and produced by outside vendors who provide designers,
writers and production artists and are printed by commercial printers.
Remarkable's regular catalog mailings include a complete buyers' guide
which is produced once a year and generally mailed in January to all active
customers. Remarkable has a database of over 250,000 customer, 100,000 of which
have ordered form Remarkable in the past two years. Remarkable anticipates
producing the buyer guide semi-annually in the future depending on available
working capital. In March, Remarkable mails a specialty mailing featuring only
its federal law posters (e.g., minimum wage, sexual harassment, workers
compensation, etc.). In April or May Remarkable does an academic mailing
featuring July to June reusable calendars which are used by academic
professionals and administrators. In September, October and November,
Remarkable concentrates on solo mailings which feature Remarkable's main
reusable calendars (January to December). These solo mailings are distinctive
in that they are packaged to look like a bank check making the consumer more
likely to open the mailing.
Marketing
Remarkable's various marketing programs are designed to attract new
customers and to stimulate additional purchases from existing customers.
Remarkable has sold to over 250,000 customers, 100,000 have purchased products
within the last two years.
V.W. Eimicke, Ltd. and V.W. Eimicke Associates, Inc. (collectively
"Eimicke") is Remarkable's largest customer and accounts for approximately 10%
of Remarkable's sales. The Company has a contracts with Eimicke which (i) make
Eimicke the sole distributor of Remarkable products in Canada, (ii) makes
Remarkable the exclusive manufacturer of laminated Federal law posters sold by
Eimicke in the United States and (iii) makes Eimicke a non-exclusive
distributor of a series of re-markable planning boards and other related
products in the United States. Each of these contracts is dated September 6,
1990 and expires November 30, 1996, and there is no assurance that this
customer will continue to purchase the Company's products on similar terms. The
loss of this customer could have a material adverse effect on the Company's
business.
Remarkable acquires new customers by selectively mailing specially
designed catalogs to prospective customers. Remarkable obtains the names of
prospective customers through the rental of selected mailing lists from outside
marketing information services and other sources. These lists include
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lists of business buyers of noncompeting direct mail companies, business
subscription lists and lists of complied business names. Remarkable also rents
its mailing list to these same sources.
After placing an initial order, new customers receive additional
catalogs and other mailings intended to stimulate continued product purchases.
Generating "bounce-back" orders is an important aspect of Remarkable's
marketing program because the costs incurred in acquiring new customers from a
particular mailing may exceed the gross profit generated by that mailing.
Remarkable uses what it believes to be sophisticated, state of the art
information systems to analyze the results of individual catalog mailings and
uses the information derived form these analyses to target future mailings. By
analyzing the results of mailings to prospective customers, Remarkable can
capture and measure its cost to acquire new customers. Each new customer is
identified and categorized. The cost of acquiring each customer is then
compared to the anticipated profitability of the future business that can be
expected from a typical customer from this category, based upon Remarkable's
prior experience. Remarkable's management uses these analyses to plan future
prospecting selections and mailings.
Remarkable also uses its information systems to update and segment its
proprietary customer database. Remarkable believes that it is able to capture
and analyze customer response to specific catalog mailings through criteria
such as recency and frequency of purchases, the dollar amount of orders and
specific products ordered. The resulting information is used to adjust the
frequency and selectivity of Remarkable's various catalog mailings to
particular groups of customers in order to achieve improved response and
profitability.
In addition, Remarkable uses these systems to analyze the performance
of each product family. This analysis enables Remarkable to strengthen the
merchandising of its catalogs and to determine the placement of and amount of
space devoted to each product in a particular catalog based upon response,
sales and profit performance.
Distribution Center
Remarkable maintains its corporate headquarters in Monsey, New York.
This location is approximately 5,000 square feet, and 3,500 square feet of
warehouse space which is used as Remarkable's distribution center. The
distribution center maintains an inventory of products offered by Remarkable in
addition to custom printed items.
Order Entry and Fulfillment
Remarkable attempts to make purchasing its specialized office products
as convenient as possible for small and medium-sized businesses. Because
approximately 60% of customer orders are placed by telephone, the efficient
handling of calls is an extremely important aspect of Remarkable's business.
Remarkable offers a nationwide toll-free telephone number for customers to use
in placing orders. Calls are received by trained order entry representatives
who utilize on-line terminals to enter customer orders into the fully
computerized order processing systems. The order entry representatives also may
use these systems to access information about products, pricing and promotions
in order to provide better service and answer customer questions. Remarkable's
telephone systems are intended to provide prompt and efficient service, and
have a negligible rate of abandoned and lost telephone calls. In addition to
telephone orders, Remarkable also receives orders by mail and through a fax
line.
When an order is entered into the system, the order is electronically
transmitted to the warehouse
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and a packing slip is printed on a printer for order fulfillment. The Company
believes that Remarkable has achieved efficiencies in order entry and
fulfillment which permit the shipment of over 95% of all orders on the day
received and the shipment of substantially all remaining orders on the
following business day. Orders generally are shipped by United Parcel Service.
Customer Service
The Company believes that exceptional customer service and customer
relations are key elements of Remarkable's marketing program. Remarkable trains
its order entry and customer relations representatives to provide prompt,
efficient and courteous service to all customers.
As part of the Company's commitment to customer service, Remarkable
maintains a "no questions asked", 30 day return policy. At the customer's
request, Remarkable will arrange for the pick-up of products to be returned and
pay all return shipping costs. Management believes that Remarkable's convenient
return policies help overcome a customer's initial reluctance to order products
from a catalog. Total returns and allowances average less than 1% of
Remarkable's total sales.
Merchandising and Purchasing
Remarkable offers a full line of time management and organizational
tools including the Remarkable line of reusable calendars which are now in the
sixteenth year of production.
Initial buying decisions are made by the Company's product manager who
is responsible for selecting and pricing products. In addition, the product
manager negotiates with suppliers, analyzes customer response and sales results
and plans catalog page presentations, product promotions and mailing schedules.
Inventory levels are maintained through the use of Remarkable's computerized
inventory control system. This system has enabled Remarkable to minimize its
inventory out-of-stock position.
Remarkable's main products, the various reusable calendars, and its
federal law posters, are manufactured specifically for Remarkable. An outside
graphic design firm does the layout and graphics for each calendar or poster in
accordance with specifications provided by Remarkable. Remarkable then orders
the appropriate paper from an independent paper vendor, and the paper and
camera ready art work produced by the graphic designer are sent to one of two
printing firms employed by Remarkable. Once the artwork is printed on the paper
it is sent to a laminator in the Rochester, New York area which applies a
plastic coating and creates the finished product, which is then shipped to the
Company's distribution center in Monsey, New York.
Other products which Remarkable sells, such as the markers, erasers
and cleaning fluids for the reusable calendars are purchased from a variety of
vendors. Geographic maps sold by Remarkable are purchased from American Map,
Inc.
Although a substantial portion of Remarkable's purchases are obtained
from a relatively small number of suppliers, the Company believes that
alternative sources of supply are available for virtually every product it
carries. Remarkable considers its relationships with its suppliers to be
excellent and it has not experienced any difficulty in obtaining brand name
products.
Management Information Systems
Remarkable utilizes a sophisticated state of the art computer system
involving all aspects of
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Remarkable's business. By handling all order entry fulfillment in a centralized
fashion, Remarkable can provide faster order entry and fulfillment and better
customer service. The general accounting system and inventory control, product
merchandising, customer development and catalog analysis function are supported
by Remarkable's computer system.
Competition
The Company and its operating subsidiary, Remarkable, operate in a
highly competitive environment. In its targeted market of small to medium-sized
businesses, Remarkable believes that its principal competitors are other direct
marketing companies and office supply superstores. Remarkable's competitors are
larger and have greater financial resources than Remarkable.
The Company believes that its competitive position is enhanced by its
Remarkable line of calendars, now in its sixteenth year of production, and
Remarkable's history of customer loyalty, price structure as well as its strong
commitment to customer service. Remarkable believes that its commitment to
customer service has enabled it to compete effectively against other direct
marketers of office supply products, some of which offer comparable products at
prices lower than those charged by Remarkable.
Direct marketing of office products has expanded in recent years at
the expense of local retail dealers. A key aspect of this growth has been the
ability of direct marketing companies to overcome initial customer reluctance
to purchasing office products by catalog. As a result, Remarkable views the
success of other direct marketing companies as beneficial to Remarkable because
it increases customer acceptance of the direct marketing concept. Remarkable
believes that its principal competitors are G-Neil, Inc., a company based in
Florida, Myron Manufacturing and Keith Clark, a division of a public company,
in the direct market segment of the specialized office products, and
specifically the time management and organizational tools industry. Competitors
of Remarkable may be financially stronger, but still view Remarkable as the
industry leader.
The office products industry has experienced increased competition in
recent years due to the emergence and rapid growth of office products
superstores. These superstores' target customers may include many of the
Company's target customers. Superstores offer a wide variety of office products
in a warehouse-type setting at prices that are lower than those typically
offered by Remarkable. Superstores are continuing to increase their share of
the office products market. The expansion of the superstores has resulted in
increased price competition throughout the industry. Remarkable has responded
to this increased competition by aggressively emphasizing Remarkable's customer
service and stylish product line. The Company has also recently introduced
price reductions in catalogs mailed to prospective customers.
Employees and Employee Training
The Company and Remarkable place great emphasis on employee training
and seek to instill in each employee a commitment to provide his or her best,
honest and personal service to every customer, large or small. Remarkable
reinforces the importance of understanding customers and their needs by
periodically requiring all of its managers and officers to receive incoming
orders and customer service calls.
Employees are given updates on Remarkable's products and progress and
are provided an opportunity to comment openly on its operations and management.
The Company intends to institute a program to provide additional incentives for
outstanding job performance, and to afford career opportunities to each
employees in accordance with his or her skills, personal effort and future
potential.
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The Company also intends to institute an incentive bonus program for the
officers and managers. The Company also intends to provide for an employee
stock purchase plan for all full-time employees of the Company and of
Remarkable. See "Management - Compensation Pursuant to Plans."
The Company and Remarkable consider relations with their employees to
be excellent. At June 30, 1996, Remarkable employed approximately 6 persons on
a full-time basis, of whom 2 were engaged in management and administration, 3
were engaged in marketing, order processing, customer service and creative
services and 1 was engaged in warehouse distribution operations. None of
Remarkable's employees are covered by a collective bargaining agreement. The
Company has 6 full time and 4 part time employees.
State Sales Taxes
The Company and Remarkable collect sales taxes only in New York and
New Jersey. Remarkable sells products to customers in all states of the United
States. Several states are currently pursuing litigation against a number of
direct marketing companies seeking sales tax for products sold into those
states. From time to time, legislation has been proposed in the United States
Congress which would have the effect of requiring Remarkable to collect and
remit sales taxes in each state where its sales are consummated. Remarkable
believes that the enactment of any such legislation, or any other changes in
applicable law that would require Remarkable to collect sales taxes in
additional states, would impose an administrative burden on Remarkable but
would not have a material adverse effect on its business.
Medical Device Production Acquisitions
In September, 1995, the Company executed a letter of intent to purchase all of
the issued and outstanding stock of Nexim Corp., a Nevada Corporation,
("Nexim"), 100% of which is owned by Mr. Andrew Jaloza who became a director of
the Company in January, 1996. Upon the execution of the letter of intent, the
Company paid Mr. Jaloza $100,000 as a down payment for the purchase of Nexim.
Nexim owns a technology known as Medphone, a medical device product. The
Company also invested, approximately, an additional $62,000 toward development
of this product. Nexim has had no revenues and is not an operating company. In
April, 1996, the Company decided not to pursue the acquisition of Nexim. The
ultimate recovery of the invested funds is uncertain. During the year ended
June 30, 1996, the Company wrote off its entire investment in this venture,
which is included in general and administrative expenses.
Item 2. Properties
The Company and Remarkable maintain their corporate headquarters at
382 Route 59, Section 310, Monsey, New York, 10952. The facility includes
approximately 5,000 square feet, of which approximately 1,500 square feet are
dedicated to office space and approximately 3,500 square feet are used for
warehouse and distribution purposes. The 5,000 square foot office is occupied
pursuant to a lease which expires in October 31, 1998 and provides for an
option to renew for two successive five-year periods. This lease is made in the
name of Success Direct, Inc. which had changed its name to Remarkable Office
Products, Inc. The monthly rent is $3,000 per month.
The Company also sublets office space in Westwood, New Jersey at a
monthly rent of $1,637. The primary lease is held by Mr. Irwin Schneidmill, the
Company's President and a director and stockholder, and expires October 31,
1998. In December, 1995, the Company moved all of its operations to the Monsey,
New York facility, and a third party has sublet and occupied this space as of
April 1, 1996.
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Item 3 Legal Proceedings
The Company filed on February 21, 1996 a complaint against Re-Prod,
Inc. and its stockholder Jacob Lahav in United States District Court for the
Southern District of New York, White Plains, New York Case Number 96 civ. 1274,
which sought a modification of the purchase price of the assets of Re-Prod,
Inc. The Company contends that certain assets, including accounts receivable,
which the Company purchased from Re-Prod, Inc. did not exist at the time of the
acquisition. As a result the Company suspended payments under a $250,000
payable to Re-Prod, Inc. and did not honor other terms of the acquisition.
On August 29, 1995 the Company purchased, as of July 1, 1995, all of
the issued and outstanding common stock of Success Direct, Inc., a mail order
business products company ("Success"). Mr. Irwin Schneidmill, who owned 41.5%
of Success, became the President and Chief Executive Officer of the Company on
August 1, 1995. Simultaneously with the acquisition of Success, Success
assigned to the Company its agreement to purchase certain business assets from
Re-Prod, Inc., including the name Remarkable Products, and the Company
consummated the transaction with Re-Prod, Inc. The assets purchased from
Re-Prod, Inc. are related to the direct mail industry.
In connection with the acquisition of the certain assets of Re-Prod,
Inc., Mr. Schneidmill and Mr. John Formicola, a stockholder of the Company, had
personally guaranteed the payment by the Company of a $250,000 promissory note
payable to Re-Prod, Inc., which represents part of the consideration paid by
the Company to acquire the assets of Re-Prod, Inc. This note bares interest at
9% per annum and is to be paid monthly by the Company in varying amounts by
applying the income received from renting its mailing list on a monthly basis.
On November 20, 1995, the Company contends the principal amount remaining under
the note was $210,127.53.
As part of the consideration for the acquisition, Re-Prod, Inc., also
received 750,000 shares of the restricted common stock of the Company. The
Agreement provided that Mr. Schneidmill would personally guarantee 375,000 of
such 750,000 shares payment of any difference between $393,750 ($1.05 per
share) and the fair market value of the shares on January 1, 1996. The value of
the common stock at February 1, 1996 was approximately $78,750. The Company and
Mr. Schneidmill and Formicola personally, have also executed a "Put Option
Agreement", whereby Re-Prod, Inc. can put these 375,000 shares to the Company
as of January 1, 1996 and demand payment of $393,750. Such demand was made on
January 31, 1996. Furthermore, Mr. Schneidmill and Mr. Formicola guaranteed
payment of the difference between $412,500 and the market value of the
remaining 375,000 shares (25,000 shares, adjusted to reflect a 15 for 1 share
reverse stock split, effective May 3, 1996) of the Company's common stock held
by Re-Prod, Inc. on July 1, 1996. The shares having a guaranteed value at July
1, 1996 are subject to an identical Put Option Agreement.
The Company, together with Mr. Schneidmill and Mr. Formicola have
contended that the assets purchased from Re-Prod, Inc. were not as represented
in the purchase agreement, and are seeking a renegotiation of the consideration
paid for those assets, including a renegotiation of their personal guarantees.
The Company has agreed to indemnify Mr. Schneidmill and Mr. Formicola against
any liability resulting form these guarantees.
On March 14, 1996, Re-Prod, Inc. and Jacob Lahav filed a counter
claim against the Company alleging specific performance on the $250,000
promissory note, fraud and conversion, breach of contract and securities fraud
and against Mr. Irwin Schneidmill and John Formicola for the enforcement of
certain financial guarantees as well as for common law fraud, securities fraud
and fraud and conversion. The
9
<PAGE>
total dollar amount claimed, approximately $1,050,000, exclusive of interest
equals the amount of the original purchase price of Re-prod, Inc. The Company
and Mr. Schneidmill are vigorously defending these claims against them and is
pursuing its claims against Re-Prod, Inc. and Mr. Lahav.
On November 15, 1996, parties entered into, and the District Court
approved by order, a Stipulation of Settlement ("Settlement") of all claims and
counter claims. As a condition to entering into the Settlement, prior to its
execution, the Company paid to Re-Prod, Inc. the $6,039.55 balance of an escrow
account to be provided for in the purchase agreement. Under the Settlement, the
Company agreed to pay to Re-Prod, Inc. a balance of the purchase price of
$400,000, of which all but the last installment of $62,500, due on March 1,
1997, has been paid. The Company must make additional payments to Re-Prod, Inc.
on September 1, 1997 of $300,000 plus that amount equal to one half of the
excess (if any) of the closing value of Re-Prod, Inc.'s shares of the Company's
common stock (based upon the mean between the bid/asked price) on September 1,
1997 over $300,000 (payable upon the tender of Re-Prod, Inc,'s certificates).
(As a result of its May 1996 1 for 15 stock split, the Company issued to
Re-Prod, Inc., certificates for 50,004 new shares in exchange for its existing
certificate for 750,000 pre-split shares of common stock.) Under the
Settlement, the counter claim against Mr. Formicola was dismissed, and Mr. John
L. Patten, a stockholder of the Company, was named as an additional guarantor.
Mr. Schneidmill and Mr. Patten have unconditionally guaranteed the prompt and
full payment and performance of all of the Company's obligation under the
Settlement.
Under the purchase agreement, the Company granted Re-Prod, Inc. a
security interest in certain of the Company's assets. The Settlement provides
that Re-Prod, Inc. will subordinate its security interest to that of any third
party which lends the Company funds to repay its obligations to Re-Prod, Inc.
under the Settlement. Except as provided above, the rights and obligations of
the parties under the purchase agreement remain unchanged until fully
performed. In the event Re-Prod, Inc. alleges that the Company is in default in
making any payment due or performing any obligation required under the
Settlement, Re-Prod, Inc. will have the right (upon ten days written notice) to
apply to the Court for entry of judgment against the Company, and Messers.
Schneidmill and Patten, jointly and severally, for $1,100,000, less any sums
previously paid to Re-Prod, Inc. under the Settlement if Re-Prod, Inc.
certifies to the Court that the Company is in default and has received notice
thereof, and such alleged default has remained uncured for ten days; the Court
can enter judgment against the Company. Upon full satisfaction by the Company
of its obligations under the Settlement and the Asset Purchase Agreement,
Re-Prod, Inc.'s counter claim will be dismissed with prejudice and the Company
and Messers. Formicola and Patten will be released from all claims under the
Re-Prod, Inc. counter claim.
Item 4 Submission of Matters to a Vote of Security Holders
There have been no matters submitted to a vote of security holders for
the period covered by this Report.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock is currently traded on the NASDAQ
Electronic Bulletin Board under the symbol "CVNR", and has several market
makers. The high and low bid (price which a market maker is willing to pay for
the shares) quotations for the Company's Shares, as reported to the Company's
management by brokerage firms listed on the specified dates by the National
Daily Quotation System, Inc.'s "Pink Sheets" as making markets in the Company's
securities are listed in the following chart. These quotations are between
dealers, do not include retail mark-ups, mark-downs or other fees and
commissions, and may not represent actual transactions. On May 3, 1996, the
Company adopted a 15 for 1 reverse stock split.
Date High Bid * Low Bid *
---- -------- -------
Fiscal 1995
-----------
September 30, 1994 $8.45 $5.62
December 31, 1994 $9.37 $9.37
March 31, 1995 $13.12 $10.78
June 30, 1995 $13.12 $12.20
Fiscal 1996
-----------
September 30, 1995 $9.14 $8.45
December 31, 1995 $4.22 $3.75
March 31, 1996 $7.02 $5.62
June 30, 1996 $5.06 $5.06
*Prices reflect the 15 for 1 reverse stock split effective
May 3, 1996.
There were approximately 1,779 shareholders of record of the Company's
common stock on June 1, 1996.
The Company has not paid dividends on its Common Stock. The Company
intends to retain any future earnings to finance its growth.
Item 6. Management's Discussion and Analysis Of Financial Condition and
Results of Operations
Management believes that a comparison of the eight month period ended
June 30, 1995 to the fiscal year ended October 31, 1994 is not meaningful
because of the length of the reporting periods and the disposition of the
Company's valve business as of April 30, 1995. Accordingly, financial
statements for the years ended June 30, 1996 and the eight months ended June
30, 1995 are presented below for comparative purposes.
The consolidated balance sheets at June 30, 1996 and 1995 and the
statements of operations for the year ended June 30, 1996 and the eight months
ended June 30, 1995 presented below have been derived from the audited
financial statements of the Company. These financial statements reflect all
adjustments, consisting only of normal recurring items, which in the opinion of
management are necessary to fairly state the Company's financial position and
results of operations for the periods presented.
11
<PAGE>
Consolidated Balance Sheet:
<TABLE>
<CAPTION>
Eight Months Ended
June 30, 1996 June 30, 1995
----------- -----------
<S> <C> <C>
Assets:
Current Assets
Cash and cash equivalents $11,950 $28,562
Accounts receivable-net of allowance
for doubtful accounts of $5,000 128,012 --
Inventory 153,037 --
Prepaid Expenses and other current assets 20,034 --
Advance Receivable 15,000 --
----------- -----------
Total Current Assets 328,033 28,562
Equipment, Furniture and Leasehold
Improvements - net of accumulated
depreciation of $10,551 35,114 --
----------- -----------
Other Assets
Intangible assets-net of accumulated
amortization of $66,667 933,333 --
Deposits 5,850 4,210
Other 2,634 --
----------- -----------
Total Other Assets 941,817 4,210
Total Assets $1,304,964 $32,722
=========== ===========
Liabilities and Shareholders' Equity:
Current Liabilities
Accounts payable $102,131 $54,522
Accrued and other expenses 48,113 --
Shareholders' loans 45,000 --
Current maturities of long-term debt
and capitalized lease obligation 37,700 --
Accrued acquisition litigation settlement 1,035,698 --
----------- -----------
Total Current Liabilities 1,268,642 54,522
Other Liabilities
Long-term debt and capitalized lease obligation 231,463 --
Net liabilities of discontinued operations 188,500 278,540
----------- -----------
Total Other Liabilities 419,963 278,540
Total Liabilities 1,688,605 333,062
----------- -----------
Total Shareholders' (Deficit) (383,641) (300,290)
----------- -----------
Total Liabilities and Shareholders' (Deficit) $1,304,964 $32,772
=========== ===========
</TABLE>
12
<PAGE>
Consolidated Statement of Operations:
<TABLE>
<CAPTION>
Year Ended Eight Months Ended
June 30, 1996 June 30, 1995
----------- -----------
<S> <C> <C>
Sales $1,071,338 $ --
Cost of Sales 280,698 --
----------- -----------
General and Administrative
Gross Profit 790,640 --
----------- -----------
Operating (Income) and Expenses
Selling 235,917 --
General and Administrative 1,109,042 122,611
Other income (36,222) --
----------- -----------
1,308,737 122,611
----------- -----------
(Loss) from Continuing Operations (518,097) (122,611)
----------- -----------
Discontinued Operations
Income (loss)from operations of discontinued
subsidiaries - net of taxes 66,957 (959,233)
(Loss) on disposal of subsidiaries - net
of taxes -- (1,498,410)
----------- -----------
Income (loss) from discontinued operations 66,957 (2,457,643)
----------- -----------
Net (Loss) $(451,140) $(2,580,254)
=========== ===========
</TABLE>
Financial Condition
The Company's financial condition at June 30, 1996 compared to June
30, 1995 changed dramatically. These changes occurred as a result of the sale
of the Company's valve and powder coating operating subsidiaries in April 1995,
and the discontinuation of its proposed acquisition of its acquisition of Nexim
in fiscal 1996 and the acquisition of Success Direct, Inc. and certain assets
of Re-Prod, effective in July, 1995.
Management believes that the sale of the operating subsidiaries has
had a positive effect on the Company as it represents a disposition of its
unprofitable operations and has positioned the Company to seek out new
acquisition candidates such as the recent acquisition of Success Direct, Inc.
The discontinuation of its acquisition of Nexim should result in a reallocation
of funds to more productive use.
The sale of Valves International, Inc., Central Valve Services, Inc.,
Alloy Valve International, Inc. and Gulf Coast Powder Coatings, Inc., the
acquisition of Success Direct, Inc. and certain assets of Re-Prod, Inc.
resulted in a net increase of current assets from $28,562 at June 30, 1995 to
$328,033 at June 30, 1996, an increase of 1,048% or $299,471. Property, plant
and equipment was increased from $0 at June 30, 1995 to $ 35,114 at June 30,
1996, an increase of 100% or $35,114. Other assets increased from $4,210 at
June 30, 1995 to $941,817 at June 30, 1996 resulting in an increase of 22,271%
or $ 937,607. As a result of the disposition of the valve divisions, the
Company experienced an increase of current liabilities from $54,522 at June 30,
1995 to $1,268,642 at June 30, 1996, an increase of 2227% or $1,268,642. The
Company also experienced an increase of long-term liabilities from $278,540 at
June 30, 1995 to $419,963 at June 30, 1996, an increase of 51% or $141,423.
The Company purchased Success and certain assets of Re-Prod, Inc. in
August 1995, effective as of July 1, 1995. Success's operations at the time of
the acquisition consisted of "business to business" direct mail office products
sales. The assets of Re-Prod consisted of a client base, inventory, accounts
receivable, equipment, telephone numbers and the use of the name "Remarkable
Products". The business of Success was started in
13
<PAGE>
October 1994, by Mr. Irwin Schneidmill, who became the Company's President in
August 1995.
Results of Operations
During the year ended June 30, 1996 the Company experienced a net loss
of $(451,140) as compared to a net loss of $(2,580,254) for the eight months
ended June 30, 1995. Cost of goods sold was $280,698 and operational expenses
were $1,308,737. Income from operations of discontinued subsidiaries was
$66,957.
From June 30, 1994 to March 31, 1995 the Company owned and operated
the industrial valve and powder coating businesses. During this period the
Company generated $575,263 in sales and had a net loss on these sales of
$(959,233). Upon the disposition of the industrial valve and powder coating
business in March 1995 to Turkey DeLite International, Inc. (a.k.a "ATCO
Corporation") ("Turkey DeLite"), the Company recognized an additional loss of
($1,433,038). This additional loss upon disposition was recorded because it was
determined that the securities of Turkey DeLite which were used as part of the
purchase of the industrial valve and powder coating assets, had no value and
because Turkey DeLite has no reliable financial information, no value of the
securities could be given. (Notwithstanding the Company's reasonable requests
for current financial information, it has not been able to obtain this
information from the management of Turkey DeLite, which is not affiliated with
the Company or within its control.) After March 31, 1995 and prior to the
acquisition of Success and Re-Prod effective July 1995, the Company did not
have any operating business. During the transitional eight month period ended
June 30, 1995 the Company experienced a net loss of ($959,233) as compared to a
net loss of ($1,603,038) for the eight months ended June 30, 1994. The net loss
of ($959,233) through date of disposition of subsidiaries was on sales of
$575,265. Cost of goods sold were $284,540 and operational expenses were
$790.766.
Effects of Inflation
The impact of inflation on the Company's financial condition and
results of operations has not been significant.
Liquidity and Capital Resources
The Company has financed its working capital requirements, capital
expenditures, and acquisitions through cash flows generated from operations,
debt, and sale of common stock. Cash used in operations for the year ended June
30, 1996 was $242,435 and cash used in operations for the eight months ended
June 30, 1995 was $429,803. The Company had $74,479 in depreciation and
amortization expense which did not require cash outlay for the year ended June
30, 1996. Cash received from financing activities of $569,716 was comprised of
issuance of common stock for $365,901, proceeds of long term debt of $197,100
and proceeds of loans from stockholders of $70,000. Cash flow used for
investing activities of $318,893 was for the purchase of Success Direct, Inc.
and certain assets of Re-Prod, Inc.
In September, 1995, the Company executed a letter of intent to
purchase all of the issued and outstanding stock of Nexim Corp., a Nevada
Corporation, ("Nexim"), 100% of which is owned by Mr. Andrew Jaloza who became
a director of the Company in January, 1996. Upon the execution of the letter of
intent, the Company paid Mr. Jaloza $100,000 as a down payment for the purchase
of Nexim. Nexim owns a technology known as Medphone, a medical device product.
The Company also invested, approximately, an additional $62,000 toward
development of this product. Nexim has had no revenues and is not an operating
company. In April, 1996, the Company decided not to pursue the acquisition of
Nexim. The ultimate recovery of the invested funds is uncertain. During the
year ended June 30, 1996, the Company wrote off its entire investment in this
venture, which is included in general and administrative expenses.
Upon the acquisition of Success, the Company assumed $250,000 of its
aggregate principal indebtedness to Performance capital at the rate of 10% per
annum. See "Certain Transactions." Performance Capital has since
14
<PAGE>
lent the Company an additional $205,000 which was converted into common stock
of the Company at the rate of $.15 per share (pre-reverse split).
The Company intends to satisfy its short term liquidity needs
primarily through operating revenue and borrowing funds from private investors
in exchange from promissory notes and warrants to purchase common stock at the
market price on the day the warrants are granted. One of the Company's
principal products are laminated federal law posters, which include the Federal
Minimum wage poster. With the recent change in the Federal Minimum wage the
Company anticipates considerable increases in sales which will fund its long
term liquidity needs.
Item 7. Financial Statements
The response to this Item is submitted as a separate section of this
report commencing on page F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not Applicable.
15
<PAGE>
PART III
Item 9 Directors and Executive Officers of the Registrant
The current executive offices and directors of the Company
are set forth below:
Name Age Position
Bob J. Sudderth 57 Chairman, Director(1)
Irwin Schneidmill 43 CEO, President, Chief Financial Officer
and Director(2)
Andrew L. Jaloza 36 Director(3)
James P. Lofland 44 Director(4)
Martin Ewenstein 61 Director(5)
Robert W. Trause 54 Director
Mark Wolchuck 44 Director
Edward J. Lerma 58 Director and Secretary(6)
Ruddy L. Munyon 49 Director(7)
(1) Bob J. Sudderth resigned as Chairman and Director of the Company
effective August 1, 1995.
(2) Mr. Schneidmill was elected President, Chief Financial Officer,
and a Director of the Company on August 1, 1995.
(3) Mr. Jaloza resigned as Director of the Company effective October
7, 1996.
(4) Mr. Lofland resigned as Director of the Company effective
October 7, 1996.
(5) Mr. Ewenstein resigned as Director of the Company effective
December 31, 1996.
(6) Mr. Lerma resigned as Director and Secretary of the Company
effective August 1, 1995.
(7) Mr. Munyon resigned as Director and Secretary of the Company
effective September 28, 1995.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Directors do not receive remuneration for their services as such, but may be
reimbursed for expenses incurred in connection therewith, such as the cost of
travel to Board meetings. Officers serve at the pleasure of the Board of
Directors until their successors have been elected and have qualified.
Bob J. Sudderth Mr. Sudderth served as Chairman of the Board,
President, and Treasurer of the Company until August 1, 1995. Mr. Sudderth has
been active in the industrial valve business since 1966, having worked in valve
sales and service, and related businesses in Oklahoma, Texas, California, New
Jersey and Canada. During the 1970's and 1980's he was active as an officer in
unrelated companies engaged in the business of industrial equipment supplies,
oil and gas development and production, and real estate development. From 1988
to 1990 he spent full time on personal investments, primarily on real estate
projects which were operated by unrelated third parties. In January, 1990, he
filed a personal voluntary Chapter 7 petition in US Bankruptcy Court for the
Northern District of Texas, Dallas Division. The Case was discharged on April
14, 1992. In late 1990, Mr. Sudderth founded and operated Valves International
in northeastern Oklahoma and later incorporated it in that state. Valves
International, Inc. had been a wholly owned subsidiary of the Company.
Following a growing volume of business with customers and suppliers in the
Texas Gulf Coast area, he acquired the industrial valve shop and office
facility at 4807 Clinton Drive in Houston in May, 1992, and changed the name to
Central Valve Services, Inc. From that company, Alloy Valve International, Inc.
was formed in October, 1992 as a separate corporation to perform both domestic
and international sales and marketing functions for valve inventory at all
company locations. CVS and AVI had both been wholly owned subsidiaries of the
Company. In
16
<PAGE>
July 1995, Mr. Sudderth became the President and Chief Executive Officer and
Director of Turkey DeLite International, Inc. (a.k.a. ATCO Corporation)
("Turkey DeLite"), which he has represented to the Company as being a publicly
traded company which trades on the "Pink Sheets". On August 1, 1995, Turkey
DeLite purchased substantially all of the valve businesses from the Company.
See "Certain Relationships and Related Transactions". On August 1, 1995, Mr.
Sudderth resigned as Chairman of the Board of the Company and no longer holds
any positions with the Company.
Irwin Schneidmill has been the President, Chief Executive
Officer and the Director of the Company since August 1, 1995. From January 1991
to July 1993, Mr. Schneidmill had been a partner at Cataino & Schneidmill,
CPAs, a public accounting firm. From July 1993 to October 1994, Mr. Schneidmill
had been the sole stockholder of Irwin Schneidmill, P.C., a public accounting
firm. Mr. Schneidmill formed Success Direct, Inc., a New Jersey corporation in
October 1995 and remains as the President of that Company. See "Certain
Relationships and Related Transactions".
Andrew L. Jaloza became a director of the Company in November
1995. For the last five years Mr. Jaloza has been a practicing attorney in New
York City. Mr. Jaloza is the sole shareholder of Nexim Corp., a corporation
that the Company had executed a letter of intent to purchase in September 1995.
See "Certain Relationships and Related Transactions".
James P. Lofland has been a director of the Company since
November of 1995. For the last five years he has owned and operated Lofland's
Restaurant in New York City.
Robert W. Trause has served as a Director since March 4,
1996. He has twenty-five years of professional experience in administration,
management, marketing and sales within small to mid-size companies. Mr. Trause
has served as a Professional Insurance Broker since 1991 with Professional
Insurance Associates, Inc., Carlsdadt, New Jersey, as well as a consultant on
employee benefits for Employer Solutions, Farmingdale, New York, in 1990-1991.
From 1988-1990 he was Senior Vice President of Administration for J.T. Moran &
Company, Incorporated, an investment banking firm where he directed
administration for the New York corporate headquarters and 26 branches (in
excess of 1000 employees).
Martin Ewenstein has served as a Director since March 4,
1996. Mr. Ewenstein is Vice President of Yonmir Pearls, Inc., a privately held
importer of pearls. Prior to 1991, he was employed by the CBS for twenty (20)
years as a Corporate Planning Economist. Futhermore, Mr. Ewenstein has worked
as a book publisher, and a real estate entreprenuer. Mr. Ewenstein received a
Master of Economics degree from Columbia University.
Mark Wolchock has served as a Director since January 8, 1997.
He has also been employed as Regional Sales Manager for the Cannon Corporation,
a publicly held corporation from 1985 until 1991. Currently, Mr. Wolchock is
acting as Regional Sales Manager of Baxter Health Care, a public corporation
and President of Majestic Solutions Inc., a privately held corporation.
Item 10. Executive Compensation
Mr. Irwin Schneidmill became the President and Chief
Executive Officer of the Company in August, 1995 at an annual salary of
$140,000 per annum. In consideration of his employment by the Company Mr.
Schneidmill also received and beneficially owns 1,000,000 options of the
Company which are immediately exercisable at $.20 per share pursuant to a Stock
Option Certificate and Agreement dated September 15, 1995. The options expire
in September 1998. In addition, the Company pays $570 per month for the lease
on Mr. Schneidmill's car plus automobile insurance. Mr. Schneidmill also
participates in the Company's group health insurance plan. Neither the Company
nor its subsidiaries paid a salary to any of its officer for the twelve month
period ending June 30, 1996.
17
<PAGE>
The following table discloses for the fiscal years ended
December 31, 1994, 1995, and 1996, individual compensation information relating
to the chief executive officer of the Company and the executive officers of the
company who earned in excess of $100,000 during 1996 (the "Named Executive
Officers").
18
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Salary Bonus Other Annual Restricted Options LTIP All Other
Principal Position Compensation Stock Awards /SARS Payouts Compensation
($)/(1) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Irwin Schneidmill
Chief Executive Officer &
President (2)
1996 140,000 0 - 0 0 0 0
1995 45,000 0 - 0 0 0 0
1994 0 0 0 0 0 0 0
Bob J. Sudderth
Chairman of the Board,
President & Treasurer (3)
1996 0 0 0 0 0 0 0
1995 0 0 0 0 0 0 0
1994 0 0 0 0 0 0 0
</TABLE>
- ---------------
(1) Mr. Schneidmill received no compensation or other benefits from the
Company during fiscal years 1994 and 1995. The amounts reported above for
fiscal year 1995 were paid to Mr. Schneidmill by Success Direct, Inc.
which is currently a wholly owned subsidiary of the Company, but during
1994 and 1995 was owned by a corporation not related to the Company.
However, because the financial results of the Company have been
consolidated with those of Success Direct, Inc. retroactively to July 1994
by reason of common ownership, compensation and other benefits paid to Mr.
Schneidmill by Success Direct, Inc. have been included in the above table.
(2) Mr. Schneidmill became President and Chief Executive Officer of the
Company in August, 1995.
(3) Mr. Sudderth served as Chairman of the Board, President and Treasurer
until August 1, 1995.
Option/SAR Grants In Last Fiscal Year
The following table sets forth information with respect to option grants
during 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
Percent of Total
Options/SARs
Granted to
Options/SARs Employees in Exercise Price
Name Granted (#) Fiscal Year ($) Expiration Date
- ---- ----------- ----------- --- ---------------
<S> <C> <C> <C> <C>
Irwin Schneidmill 66,667 (1) (2) 100% $ 3.00 9/14/98
</TABLE>
- --------------
(1) All options were granted pursuant to a stock option certificate and
agreement dated September 15, 1995, and are non-qualified options
receiving no special tax benefits. The agreement provided for the grant of
1,000,000 options, immediately exercisable, representing the right to
purchase 1,000,000 shares of the Company's restricted common stock. The
term of the options is three years from the date of grant. The option
price and number of option shares are adjustable only according to a
non-dilution provision.
(2) 66,667 adjusted to reflect a 15 for 1 share reverse stock split, effective
May 1996.
19
<PAGE>
Aggregated Option/SAR Exercises In Last fiscal Year and F/Y End
Option/SAR Values
The following table sets forth information with respect to option exercises ad
fiscal year-end option values for the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Value Options/SARs in-the-money Options/SARs at
On Acquired Realized at FY-End FY-End (1)
Name Exercise (%) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ --- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Irwin Schneidmill 0 - 66,667/0 (2) $333,735/0
</TABLE>
- --------------
(1) Based upon the bid price of the Company's Common Stock on June 30, 1996
of $5.06.
(2) 66,667, adjusted to reflect a 15 for 1 share reverse stock split,
effective May, 1996.
(3) No stock appreciation rights ("SAR") were granted in 1995-1996.
Employment and Consulting Agreements
Mr. Schneidmill has entered into a five-year employment
agreement dated March 1, 1996 with the Company to act as President and Chief
Executive Officer; which provides for an initial annual base salary of
$140,000. Mr. Schneidmill shall also be entitled to bonuses based on increased
sales and earnings of the operating entity. Mr. Schneidmill will be entitled to
an annual cash bonus in each year of the term of the agreement equal to 2% of
Remarkable's gross sales in excess of $1,500,000, plus 3% of gross sales in
excess of $2,500,000, payable on a quarterly basis (such gross sales as
determined by the Company's independent auditors at the end of each sales
quarter). These quarterly bonuses will not be paid in any period in which
Remarkable does not have pre-tax income equal to or greater than pre-tax
profits for the same period of the preceding year. Moreover, the agreement
provides that bonuses will be paid only according to the Company's cash flow
needs. Mr. Schneidmill also has agreed to defer portions of his base salary to
assist the Company in meetings its cash flow needs and to support its capital
expenditures, if he, in his sole discretion, deems it appropriate. If a bonus
is paid in any quarter, and the Company determines at the end of any fiscal
year that as bonus was earned on an annual basis, Mr. Schneidmill's annual
compensation will be decreased to recoup any bonus amounts paid but not earned.
Under the employment agreement, Mr. Schneidmill also receives
disability insurance, hospitalization, major medical, vacation and other
employee benefits, reimbursement of reasonable business expenses incurred on
behalf of the Company, and use of Company-owned vehicles.
20
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 1, 1996, the record and beneficial
ownership of Common Stock of the Company by each officer and director, all
officers and directors as a group, and each person known to the Company to own
beneficially or of record five percent or more of the outstanding shares of the
Company:
Number of Percentage
Shares Owned of Shares
Name and Address Beneficially(1)(3) Outstanding
- ---------------- ------------------ -----------
Irwin Schneidmill(2) 94,339 9.9%
20 Roble Road
Suffern, NY 10901
Bob J. Sudderth(4) 63,500 6.66%
P.O Box 32
Nowata, OK 74448
John Formicola (5) 187,648 19.68%
345 Kinderkamack Rd
Westwood, NJ 07675
Re-Prod, Inc. 50,000 5.24%
245 Pegasus Avenue
Northvale, NJ 07647
Jacob Lahav 50,000 5.24%
20 Deerkill Road
Hohokus, NJ 07423
Officers and directors 157,667 16.56%
as a group (2 persons)(2) **
- -------------
** Unless otherwise specified, the address of each named person is
c/o 382 Route 59, Section 310, Monsey, NY 10952.
(1) Shares of Common Stock which are not outstanding but which a person has
the right to acquire within sixty days pursuant to outstanding options are
deemed outstanding for the purpose of computing such person's ownership of
Common Stock owned by such person, but are not deemed to be outstanding
for the purpose of computing number of shares or the percentage of Common
Stock owned by any other person.
(2) Includes 66,667 shares issuable upon exercise of currently exercisable
options (adusted to reflect the Company's May 1996 15 for 1 share reverse
stock split). See "Executive Compensation."
(3) Does not include 278,153 of Preferred Stock of the Company which is
currently exercisable into Common Stock.
(4) Includes 8,333 shares owned by Joyce Sudderth, the wife of Bob J. Sudderth.
(5) Includes 27,667 shares owned by Performance Capital Corp., 100% of which
100% is owned by John Formicola, includes 93,316 shares of Common Stock
held by Mr. Formicola as a result of a conversion of
21
<PAGE>
approximately $205,000 in debt at a conversion rate of $2.25 per share,
includes options to purchase 66,665 shares of Common Stock which are
immediately exercisable at $3.00 per share.
(6) By virtue of his positions as Chief Executive Officer and President of
Re-Prod, Inc., as well as a 100% owner of Re-Prod, Inc., Mr. Lahav may be
deemed to have voting and investment power with respect to, and therefore
may be deemed beneficial owner of, Re-Prod Inc.'s ownership of the
Company.
7
Item 12. Certain Relationships and Related Transactions
On August 29, 1995 the Company purchased, as of July 1, 1995, all of
the issued and outstanding common stock of Success Direct, Inc., a mail order
business products company ("Success"). The principal stockholder of Success,
Mr. Irwin Schneidmill who owned 41.5% of Success, became the President and
Chief Executive Officer of the Company on August 1, 1995.
Simultaneously with the acquisition of Success, Success assigned to
the Company its agreement to purchase certain business assets from Re-Prod,
Inc., including the name Remarkable Products, and the Company consummated the
transaction with Re-Prod, Inc. The assets purchased from Re-Prod, Inc. are
related to the direct mail industry.
In connection with the above, the Company paid to Mr. Schneidmill
415,000 shares of the restricted common stock of the Company. Additionally, in
connection with the acquisition of certain assets of Re-Prod, Inc., Mr.
Schneidmill and Mr. John Formicola a stockholder of the Company, have
personally guaranteed the payment by the Company of a $250,000 promissory note
payable to Re-Prod, Inc. This note bares interest at 9% per annum and is to be
paid monthly by the Company in varying amounts by applying the income received
from renting its mailing list on a monthly basis. On November 20, 1995, the
Company contends there was $210,127.53 principal amount remaining under the
note.
As part of the acquisition Re-Prod, Inc., also received 750,000 shares
(50,000 shares, post-split) of the restricted common stock of the Company.
375,000 (25,000, post-split) of such 750,000 were personally guaranteed by Mr.
Schneidmill to have a market value of $393,750 ($1.05 per share) on January 1,
1996. The value of the common stock at February 1, 1996 was approximately
$78,750. The Company and Mr. Schneidmill and Formicola personally, have also
executed a "Put Option Agreement", whereby Re-Prod, Inc. can put these 375,000
(25,000, post-split) shares to the Company as of January 1, 1996 and demand
payment of $393,750. Such demand was made on January 31, 1996. Furthermore, Mr.
Schneidmill and Mr. Formicola have guaranteed that the remaining 375,000
(25,000, post-split) shares of the Company's common stock held by Re-Prod, Inc.
will have a market value of $412,500 on July 1, 1996. The shares having a
guaranteed value at July 1, 1996 are subject to an identical Put Option
Agreement.
The Company, together with Mr. Schneidmill and Mr. Formicola have
contended that the assets purchased from Re-Prod, Inc. were not as represented
in the purchase agreement and are seeking a renegotiation of the consideration
paid for those assets, including a renegotiation of their personal guarantees.
See "Litigation".
The Company has agreed to indemnify Mr. Schneidmill and Mr. Formicola
against any liability resulting from these guarantees.
Mr. Schneidmill is the lessee of 2,850 square feet of office space at
345 Kinderkamack Road in Westwood, New Jersey. The annual rent for such space
is $51,300. Mr. Schneidmill has sublet a portion of this space to the Company
at a monthly rent of $1,637. Although, as of December 1995, the Company has
moved substantially all of its operations to Monsey, New York and is not
currently utilizing the Westwood, New Jersey space, it will paying its rent
under the sub-lease until April 1, 1996 when another sub-tenant will take over
the space. In addition, a portion of this space is sublet to Performance
Capital Corporation, a financial consulting firm owned
22
<PAGE>
by Mr. John Formicola, a shareholder of the Company, for $500 per month. In
return for consulting services and certain loans made to the Company by
Performance Capital Corporation, the Company has paid this $500 per month since
December 1995.
Performance Capital Corporation which is owned by Mr. John Formicola
had lent Success $250,000 prior to its acquisition by the Company in the form
of five promissory notes in the amount of $50,000 each dated December 15, 1994
and January 15, February 15, March 15 and April 15, 1995. Each bearing interest
at the rate of 10% per annum. Performance Capital Corporation had owned of the
outstanding common stock 41.5% of Success at that time. The Company assumed
that debt upon the acquisition of Success and paid to Performance Capital
Corporation 415,000 shares of common stock of the Company. The terms of that
debt are as follows: all interest is to accrue through 1995 and payments on
interest are to commence February 1, 1996 and accrued interest shall be paid in
six equal monthly installments. Payments on principal are to commence February
1, 1997 and shall be paid monthly, together with interest, for 60 months.
Subsequent to the acquisition of Success by the Company, Mr. Formicola and or
Performance Capital have lent the Company an aggregate of approximately
$205,000 for working capital purposes. This $205,000 is subject to an 11%
demand promissory note date August 1, 1995.
On August 31, 1995, the Company entered into a purchase agreement
whereby it sold all of its wholly owned subsidiaries with the exception of U.S.
Powder Coatings, Inc. to ATCO Corporation ("Turkey DeLite" or "Purchaser") for
$1,900,000 in cash, promissory notes and common stock. Turkey DeLite's
principal executive officer, Mr. Bob J. Sudderth, is also the Chairman of the
Board of Directors of the Company. The subsidiaries referred to herein include
Valves International, Inc., Central Valve Services, Inc., Alloy Valve
International, Inc. and Gulf Coast Powder Coatings, Inc. The sales price
consisted of a combination of 1,550,000 shares of common stock of the
Purchaser, issuance of a $150,000 promissory note and the payment of $200,000
contingent upon the successful completion of a stock offering by the Purchaser.
Currently, the Company's largest asset is its shareholdings of Turkey DeLite.
Mr. Sudderth had sold certain equipment and facilities to Central
Valve Services, Inc., which had been a subsidiary of the Company at the time of
such sale. Mr. Sudderth is owed approximately $600,000 from Central Valve
Services, Inc. as a result of such sale. The Company is not liable for such
debt.
In September, 1995, the Company executed a letter of intent to
purchase all of the issued and outstanding stock of Nexim Corp., a Nevada
Corporation, ("Nexim"), 100% of which is owned by Mr. Andrew Jaloza who became
a director of the Company in January, 1996. Upon the execution of the letter of
intent, the Company paid Mr. Jaloza $100,000 as a down payment for the purchase
of Nexim. Nexim owns a technology known as Medphone, a medical device product.
The Company also invested, approximately, an additional $62,000 toward
development of this product. Nexim has had no revenues and is not an operating
company. In April, 1996, the Company decided not to pursue the acquisition of
Nexim. The ultimate recovery of the invested funds is uncertain. During the
year ended June 30, 1996, the Company wrote off its entire investment in this
venture, which is included in general and administrative expenses.
Richard Greene, the Company's former President and legal counsel
received 100,000 shares of the Company's common stock in full payment of legal
services previously rendered to the Company. These shares were registered for
Mr. Greene pursuant to a Form S-8 filed with the Securities and Exchange
Commission on September 18, 1995.
23
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of
Regulation S-B).
Exhibit
Numbers Description
------- -----------
* 3(a) - Certificate of Incorporation of the Company
* 3(b) - Bylaws of the Company
** 4(a) - Form of Common Stock Certificate
** 10(a) - Purchase Agreement between the Company and Gulf
Coast Powder Coatings, Inc., and ATCO Corporation
for the purchase of Gulf Coast Powder Coatings,
Inc. by ATCO Corporation dated August 31, 1995.
** 10(b) - Purchase Agreement between the Company and Valves
International, Inc., Central Valve Services, Inc,
Alloy Valve International, Inc. (d/b/a CVC
International and/or T.J. Lingle International)
(collectively, the "Subsidiaries") and ATCO
Corporation for the purchase of the Subsidiaries by
ATCO Corporation, dated August 31, 1995.
** 10(c) - Purchase Agreement between Success Direct, Inc.,
Irwin Schneidmill, Performance Capital Corporation,
Martin Ewenstein, Brian Ugles, John Ecke and Cathy
Santo ("Sellers") and the Company, for the purchase
by the Company of Success Direct, Inc.
** 10(d) - Assignment of contract between Success Direct, Inc.
and the Company for the rights to purchase assets
of Re-Prod, Inc., dated August 31, 1995.
** 10(e) - Purchase Agreement between the Company and Re-Prod
Inc., for the purchase of certain assets of
Re-Prod, Inc., dated August 31, 1995.
*** 10(f) - Promissory Note in the principal amount of $205,000
bearing interest at 11% per annum between the
Company as borrower and Performance Corporation as
lender, dated August 1, 1995.
*** 10(g) - Promissory Notes dated December 15, 1994 through
April 15, 1995 in the aggregate amount of $250,000
($50,000) bearing interest at 10% per annum between
Success Direct, Inc. as borrower and Performance
Capital Corporation as lender.
*** 10(h) - Employment Agreement between Irwin Schneidmill and
the Company dated March 1, 1996.
*** 10(i) - Supply contracts between the Company and V.W.
Eimicke, Ltd. each dated September 6th, 1990.
*** 10(j) - Indemnity Agreement between the Company and Irwin
Schneidmill and J John Formicola, indemnifying them
against liabilities arising from the
24
<PAGE>
acquisition of assets of Re-Prod, Inc.
- Subsidiaries of the Company
*** 10(k) - Stock Option Certificate and Agreement between the
Company and Irwin Schneidmill dated September 15,
1995.
(b) Reports on Form 8-K - The Registrant did not file any reports
on Form 8-K during the last quarter of the fiscal year ended
June 30, 1996.
* Incorporated by reference to the Company's Registration Statement on
Form S-8 dated September 18, 1995.
** Incorporated by reference to the Company's Report on Form 8-K dated
August 31, 1995.
*** Incorporated by reference to the Company's Report on Form 10-KSB for
the period ended June 30, 1995.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CELESTIAL VENTURES CORPORATION
By: /s/ IRWIN SCHNEIDMILL
------------------------------
Irwin Schneidmill
President, Chief Executive, and
Financial Officer and a Director
Dated: June 11, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons, which include the
Chief Executive Officer, the Chief Financial Officer and a majority of the
Board of Directors, on behalf of the Registrant and in the capacities and on
the dates indicated:
Name Title Date
- ---- ----- ----
/s/ Irwin Schneidmill President Chief Executive June 11, 1997
- ---------------------- and Financial Officer, and
Irwin Schneidmill a Director (Principal
Executive and Financial Officer)
/s/ Robert Trause Director June 11, 1997
- ----------------------
Robert Trause
/s/ Mark Wolchock Director June 11, 1997
- ----------------------
Mark Wolchock
26
<PAGE>
CELESTIAL VENTURES CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 1996
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
Celestial Ventures Corporation and Subsidiaries
We have audited the accompanying balance sheet of Celestial Ventures
Corporation and Subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, shareholders' (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Celestial Ventures Corporation
and Subsidiaries as of June 30, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
November 12, 1996
F-2
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Current Assets
Cash and cash equivalents $ 11,950
Accounts receivable - net of allowance for doubtful
accounts of $5,000 128,012
Inventory 153,037
Prepaid expenses and other current assets 20,034
Advance receivable 15,000
-------------
328,033
-------------
Equipment, Furniture and Leasehold Improvements -
net of accumulated depreciation of $10,551 35,114
-------------
Other Assets
Intangible assets - net of accumulated amortization
of $66,667 933,333
Deposits 5,850
Other 2,634
-------------
941,817
-------------
Total Assets $ 1,304,964
=============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Liabilities and Shareholders' (Deficit)
Current Liabilities
Accounts payable $ 102,131
Accrued expenses 48,113
Shareholders' loans 45,000
Current maturities of long-term debt and capitalized
lease obligation 37,700
Accrued acquisition litigation settlement 1,035,698
-------------
1,268,642
-------------
Other Liabilities
Long-term debt and capitalized lease obligation 231,463
Net liabilities of discontinued operations 188,500
-------------
419,963
-------------
Total Liabilities 1,688,605
-------------
Shareholders' (Deficit)
Convertible Preferred Stock - $.001 par value; authorized 50,000,000
shares, issued and outstanding 271,853
shares 272
Common Stock - $.001 par value; authorized 50,000,000
shares, issued and outstanding 1,076,186 shares 1,076
Additional paid-in capital 4,817,498
Accumulated (deficit) (5,202,487)
-------------
Total Shareholders' (Deficit) (383,641)
-------------
Total Liabilities and Shareholders' (Deficit) $ 1,304,964
=============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Eight Months Ended
June 30, 1996 June 30, 1995
----------------------------------------
<S> <C> <C>
Sales $ 1,071,338 $ -
Cost of Sales 280,698 -
--------------- --------------
Gross Profit 790,640 -
--------------- --------------
Operating (Income) and Expenses
Selling 235,917 -
General and administrative 1,109,042 122,611
Other income (36,222) -
--------------- --------------
1,308,737 122,611
--------------- --------------
(Loss) from Continuing Operations (518,097) (122,611)
--------------- --------------
Discontinued Operations
Income (loss) from operations of discontinued
subsidiaries - net of taxes 66,957 (959,233)
(Loss) on disposal of subsidiaries - net
of taxes - (1,498,410)
--------------- --------------
Income (loss) from discontinued operations 66,957 (2,457,643)
--------------- --------------
Net (Loss) $ (451,140) $ (2,580,254)
=============== ==============
Weighted Average Common Shares Outstanding 878,239 383,463
=============== ==============
(Loss) Per Share $ (.51) $ (6.73)
=============== ==============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' (Deficit)
For the Eight Months Ended June 30, 1995 and the Year Ended June 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
------------------- -------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital (Deficit) Total
=========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - October 31, 1994 889,426 $ 889 517,924 $ 518 $ 3,716,763 $ (1,887,021) $ 1,831,138
Stock issued - - 142,467 142 448,684 - 448,826
Net (loss) - - - - - (2,580,254) (2,580,254)
--------- ------- ---------- ------- ----------- ------------ -----------
Balance - June 30, 1995 889,426 889 660,391 660 4,165,447 (4,467,286) (300,290)
Stock issued - - 194,500 194 365,707 - 365,901
Stock issued for legal services
rendered - - 13,333 13 49,987 - 50,000
Debt conversions to stock - - 99,983 100 234,858 - 234,958
Conversions of preferred stock (617,573) (617) 40,421 41 576 - -
Net (loss) - - - - - (451,140) (451,140)
Acquisition of Success Direct
(Pooling) - - 66,667 67 933 (284,061) (283,061)
Issuance of shares in reverse split - - 891 1 (10) - (9)
--------- ------- ---------- ------- ----------- ------------ -----------
Balance - June 30, 1996 271,853 $ 272 1,076,186 $ 1,076 $ 4,817,498 $ (5,202,487) $ (383,641)
========= ======= ========== ======= =========== ============ ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 1 of 2
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Eight Months Ended
June 30, 1996 June 30, 1995
========================================
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $ (451,140) $ (2,580,254)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 74,479 -
Loss on sale of subsidiaries - 1,498,410
Income (loss) from discontinued operations (66,957) 959,233
(Increase) decrease in:
Accounts receivable (16,708) -
Inventory 103,181 -
Prepaid expenses and other current assets (6,665) -
Increase (decrease) in:
Accounts payable (17,666) 18,694
Accrued and other expenses 42,727 -
Accretion on redeemable common stock 56,250 -
Expenses paid through the issuance of common stock 63,147 -
------------ --------------
Net cash used in continuing operations (219,352) (103,917)
Net cash used in discontinued operations (23,083) (325,886)
------------ --------------
(242,435) (429,803)
------------ --------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 365,901 448,826
Payment of officer's loan (39,166) -
Proceeds of loans from shareholder 70,000 -
Payments of long-term debt (24,119) -
Proceeds from long-term debt 197,100 -
------------ --------------
569,716 448,826
------------ --------------
Cash Flows from Investing Activities
Purchase of subsidiary (315,000) -
Deposits advanced 14,352 (29,210)
Acquisitions of fixed assets (18,245) -
------------ --------------
(318,893) (29,210)
------------ --------------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 2 of 2
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Eight Months Ended
June 30, 1996 June 30, 1995
========================================
<S> <C> <C>
Net Increase (Decrease) in Cash and Cash Equivalents $ 8,388 $ (10,187)
Cash and Cash Equivalents - beginning of period 3,562 13,749
------------ --------------
Cash and Cash Equivalents - end of period $ 11,950 $ 3,562
============ ==============
Supplemental Disclosures
Cash paid for:
Interest $ 6,612 $ -
============ ==============
Non-cash investing and financing transactions:
Acquisition of subsidiary through issuance of
common stock $ 1,000 $ -
============ ==============
Issuance of redeemable common stock,
related accretion thereon, and debt as a
result of acquisition litigation settlement $ 1,035,698 $ -
============ ==============
Shareholder loans converted to common stock $ 25,000 $ -
============ ==============
Long-term debt converted to common stock $ 209,958 $ -
============ ==============
Common stock issued for services rendered $ 50,000 $ -
============ ==============
</TABLE>
See notes to financial statements.
F-8
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996 and 1995
- -------------------------------------------------------------------------------
1 - Business and Summary of Significant Accounting Policies
Celestial Ventures Corporation ("CVC") was organized under the laws of
the State of Nevada on January 28, 1987. CVC's activities consist of
ownership of various diversified businesses. On May 1, 1995, CVC sold
its businesses which were involved in the sales and repair of industrial
valves, and application of powder coatings onto industrial materials.
CVC purchased a wholly-owned subsidiary on July 1, 1995, Success Direct,
Inc., which is in the business of Business to Business direct mail
marketing in the United States and Canada. In December, 1995, the
corporate name of Success Direct, Inc. was changed to Remarkable Office
Products, Inc. ("Remarkable"). Effective June 30, 1995, CVC changed its
year-end from October to June.
Significant accounting policies follow:
a. Principles of Consolidation - The consolidated financial statements
include the accounts of CVC and its subsidiaries (the "Company")
after elimination of intercompany accounts and transactions.
b. Inventory - Inventory, consisting primarily of finished goods, is
valued at the lower of cost (first-in, first-out basis) or market.
c. Equipment , Furniture and Leasehold Improvements - Equipment,
furniture and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is provided over the
estimated useful lives of the assets using the straight-line method.
d. Intangible Assets - The costs of the customer list, trademarks and
telephone numbers acquired are being amortized on a straight-line
basis over 15 years.
e. Income Taxes - Current income taxes are based on the taxable income
for the year, as measured by the current year's tax returns.
Deferred income taxes arise primarily due to various temporary
differences between financial and income tax reporting. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
f. Reverse Stock Split - On May 3, 1996, the Company effected a
1-for-15 reverse stock split which has been reflected in these
financial statements.
g. Earnings Per Share - Computed by dividing the net loss by the
weighted average number of shares outstanding during the year.
Common stock equivalents have not been included in the
earnings-per-share computation because of their anti-dilutive
effect.
Continued
F-9
<PAGE>
h. Advertising costs - Advertising costs are expensed as incurred and
amounted to approximately $80,700 and $-0- in 1996 and 1995,
respectively, and are included in selling expenses.
i. Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
j. Reclassifications - Various accounts in the prior year financial
statements have been reclassified for comparative purposes to
conform with the presentation in the current year's financial
statements. These reclassifications had no impact on the results of
operations.
2 - Equipment, Furniture and Leasehold Improvements
As of June 30, 1996, equipment, furniture and leasehold improvements
are summarized as follows:
Equipment $ 36,375
Furniture and Fixtures 3,749
Leasehold Improvements 5,541
-------------
45,665
Less: Accumulated depreciation and amortization 10,551
-------------
$ 35,114
=============
Depreciation expense for the year ended June 30, 1996 was $7,793.
3 - Intangible Assets
As of June 30, 1996, intangible assets are summarized as follows:
Customer List $ 850,000
Trademarks 100,000
Telephone Numbers 50,000
-------------
1,000,000
Less: Accumulated amortization 66,667
-------------
$933,333
=============
Amortization expense for the year ended June 30, 1996 was $66,667.
Continued
F-10
<PAGE>
4 - Long-Term Debt and Capitalized Lease Obligations
At June 30, 1996, long-term debt consists primarily of an obligation to
Performance Capital, a company owned by a stockholder of the Company.
This obligation was assumed in connection with the acquisition of
Success Direct, Inc.
Notes Payable - Performance Capital - five separate
$50,000 notes (dated December, 1994; January, 1995;
February, 1995; March, 1995; and April, 1995).
Payable in monthly principal payments of $833 for
each note beginning February, 1997 for 60 consecutive
months. Interest is 9% for all notes, has accrued
through December, 1995 and is payable monthly
beginning January, 1996 on the unpaid principal
balance. On November 12, 1996, the Company entered
into an agreement to renegotiate the five notes
payable (of $50,000 in principal each) held by
Performance Capital. In the renogiated agreement,
Performance Capital agreed to waive and forego all
rights to interest accrued through September 30, 1996
and, beginning October 1, 1996, interest of 10% per
annum is to be paid to Performance Capital. The
modified agreement calls for repayment of the notes
payable balance as follows:
(bullet) January 1, 1997 - $6,250 - representing
interests earned from October 1, 1996
through December 31, 1996.
(bullet) January 1, 1997 - $25,000 - to be applied
to outstanding principal balance.
(bullet) February 1, 1997 and the first of every
month until December 1,1998 - $3,500 - to
be applied to interest and principal.
All remaining amounts outstanding under the Notes
will be due and payable on December 31, 1998.
$250,000
Capitalized Lease Obligation - assumed in connection
with the acquisition of Success Direct, Inc. Payable
in monthly installments of $567, inclusive of
interest at an annual rate of approximately 14%.
Expires December, 1999 and is collateralized by
various equipment
19,163
-----------
Less: Current maturities of long-term debt 269,163
37,700
-----------
$ 231,463
===========
Continued
F-11
<PAGE>
Principal payments required for the five years subsequent to June 30,
1996 are summarized as follows:
June 30, 1997 $ 37,700
1998 26,375
1999 201,293
2000 3,234
2001 561
-----------
$ 269,163
===========
5 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
recognized for financial reporting and the amounts recognized for income
tax purposes. The significant components of deferred tax assets, as of
June 30, 1996, are as follows:
Assets
Net operating loss carryforwards $ 408,000
Less: Valuation allowance 408,000
----------
$ -
==========
The net deferred tax asset is fully offset by a valuation allowance due
to uncertainties surrounding the ultimate realization of those assets.
At June 30, 1996, approximately $1,200,000 of net operating loss
carryforwards, which expire in various periods through 2011, are
available to offset future taxable income. The valuation allowance
increased by $33,000 as compared to June 30, 1995.
6 - Discontinued Operations and Sale of Subsidiaries
In 1994, the Company discontinued operations of its wholly-owned
subsidiary, U.S. Powder Coaters, Inc. ("USPC"), whose principal business
activity consisted of treating and coating metal and non-metal
materials. During the eight months ended June 30, 1995, the Company
wrote-off certain equipment of USPC, with an aggregate book value of
$459,192, which was deemed worthless. During the year ended June 30,
1996, the Company settled certain outstanding payable obligations of
USPC, resulting in the recognition of a gain in the amount of $66,957.
As of June 30, 1996, the Company's aggregate net liabilities relating to
the discontinueed operations of USPC amounted to $188,500, of which
$170,000 represented a demand note obligation due to R.M. Engineering
relating to a previous equipment purchase. The note is due on demand,
bears interest at 4% and is secured by the related equipment.
Continued
F-12
<PAGE>
To date, the Company has no formal plans to dispose of this entity.
On May 1, 1995, the Company discontinued the operations of two
wholly-owned subsidiaries, Valve International, Inc. and Subsidiaries
and Gulf Powder Coatings, Inc. which comprised the Company's entire
valve manufacturing and coating businesses. Effective April 30, 1995,
the Company sold these subsidiaries to Turkey DeLite, Inc. ("Turkey
DeLite") in exchange for 1,550,000 shares of Turkey DeLite common stock,
a promissory note in the amount of $200,000, and a future payment of
$150,000 contingent upon completion of a future stock offering by Turkey
DeLite. As of the effective date of the transaction, a stockholder and
the chief executive officer of the Company was also a stockholder and
the chief executive officer of Turkey DeLite.
After consummating this transaction, management determined that the
ultimate realization of the promissory notes, common stock and the
future contingent payment was uncertain and fully reserved against these
assets, resulting in an aggregate loss on disposal of these subsidiaries
in the amount of $1,498,410 being recorded for the year ended June 30,
1995.
During the year ended June 30, 1996 and the period November 1, 1994
through June 30, 1995, the Company's results from discontinued
operations, excluding its loss on disposal of subsidiaries, consisted of
the following:
<TABLE>
<CAPTION>
Gulf Coast Valves U.S.
Powder International, Inc. Powder
Coatings, Inc. and Subsidiaries Coaters, Inc. Total
==============================================================================
<S> <C> <C> <C> <C>
1996
Income $ - $ - $ 66,957 $ 66,957
Expenses - - - -
----------- ------------ ------------ -------------
$ - $ - $ 66,957 $ 66,957
=========== ============ ============ =============
1995
Income $ 158,311 $ 416,952 $ - $ 575,263
Expenses 153,347 921,957 459,192 1,534,496
----------- ------------ ------------ -------------
$ 4,964 $ (505,005) $ (459,192) $ (959,233)
=========== ============ ============ =============
</TABLE>
Due to the uncertainties surrounding the ultimate realization of any tax
benefit arising from the losses from discontinued operations and loss on
disposal of subsidiaries, the related gross deferred tax assets have
been fully offset by valuation allowances resulting in no net tax
benefits from these losses for the year ended June 30, 1996 and the
eight month period ended June 30, 1995.
Continued
F-13
<PAGE>
7 - Acquisitions of Subsidiary, Name Change and Subsequent Event
Effective July 1, 1995, the Company consummated a business combination
with Success Direct, Inc. ("Success") a mail order products company. The
acquisition, which resulted in the Company's issuance of 66,667 shares
(as adjusted for the subsequent reverse stock split by the Company) of
restricted common stock in exchange for all of the stock of Success, was
accounted for as a reverse acquisition. A reverse acquisition is
equivalent to the issuance of stock by the acquired company for the net
monetary assets of the acquirer, accompanied by a recapitalization. The
accounting for a reverse acquisition is similar to that of a pooling of
interest, as the historical cost basis of the assets and liabilities is
utilized and no goodwill is recorded. In connection with this
transaction, Success became a wholly-owned subsidiary of the Company and
the former principal stockholder of Success became the President, Chief
Executive Officer and a stockholder of the Company.
The summarized assets and liabilities of the separate companies on July
1, 1995, the date of acquisition, were as follows:
Success
(Acquired
Company Company)
============================
Current Assets $ 28,562 $ 65,891
Property and Equipment - net - 24,681
Other Assets 4,210 5,992
------------ ------------
Total Assets 32,772 96,564
------------ ------------
Current Liabilities 54,522 110,808
Long-Term Liabilities 278,540 268,816
------------ ------------
Total Liabilities 333,062 379,624
------------ ------------
Total Assets and Liabilities $ (300,290) $ (283,060)
============ ============
In December, 1995, the corporate name of Success was changed to
Remarkable Office Products, Inc. ("Remarkable").
On October 7, 1996, the Board of Directors unanimously agreed to pursue
an offer to purchase Remarkable from the Company.
On November 21, 1996, (effective October 1, 1996) the Company sold all
of the issued and outstanding capital stock of Remarkable to Dynamic
Products Corp. ("DPC"), a company under common management, for
$1,406,250. The President and Chief Executive Officer for the Company is
also the President, Chief Executive Officer and
Continued
F-14
<PAGE>
principal stockholder of DPC. In exchange for all of the stock of
Remarkable, the Company is to receive from DPC the following
consideration: (i) $600,000, payable in the form of a promissory note of
$450,000 due March 21, 1997; a cash payment of $43,549 and repayment of
the recorded intercompany balance due from the Company to Remarkable of
$106,451, and (ii) assumption by DPC of certain liabilities of the
Company in the amount of $806,250. During October, 1996, in connection
with the disposal of this wholly-owned subsidiary, the Company realized
a gain of approximately $448,000.
8 - Acquisition of Certain Assets of Re-Prod, Inc. and Litigation Settlement
In connection with the acquisition of Success Direct, Inc. above, the
Company was assigned a contract to purchase certain assets of Re-Prod,
Inc. This acquisition, effective July 1, 1995, was accounted for as a
purchase. The purchase price of $1,315,000 was allocated among the
assets as follows:
Accounts Receivable $ 107,000
Inventory 208,000
Customer List 850,000
Trademarks 100,000
Telephone Numbers 50,000
-------------
$ 1,315,000
=============
The intangibles (customer list, trademarks, and telephone numbers) will
be amortized over their estimated useful lives of 15 years.
The purchase price was paid as follows:
Cash $ 315,000
Note Payable 250,000
Redeemable Common Stock 750,000
--------------
$1,315,000
==============
The note bears interest, payable monthly, at 9% per annum on the unpaid
balance. Monthly payments of principal are also required, equaling the
greater of net list rental income or $10,000. Two of the Company's
shareholders personally guaranteed the payment of this note.
The Company issued 750,000 shares of stock (pre-reverse split) valued at
$1.00 per share. The Company guaranteed, through the issuance of put
options, the value of 375,000 shares of the common stock to be $1.05 per
share by January 1, 1996 and the value of the remaining 375,000 shares
to be $1.10 per share by July 1, 1996. The President and a stockholder
of the Company, as well as the Company, have also guaranteed the value.
Continued
F-15
<PAGE>
On February 21, 1996, the Company initiated a lawsuit against Re-Prod,
Inc., in Federal Court in the Southern District of New York, White
Plains, claiming a misrepresentation of the value of the assets
acquired. The Company stopped payments on the note payable and did not
honor the options.
On March 14, 1996, Re-Prod, Inc. counter-claimed against the Company,
claiming, among other things, breach of contract, failure to pay on
promissory notes, and failure to honor guarantees.
On November 15, 1996, the Company and Re-Prod, Inc. entered into, and
the District Court approved by order, a Stipulation of Settlement
("Settlement") of all claims and counter claims. As a condition to
entering into the Settlement, prior to its execution, the Company paid
to Re-Prod, Inc. the $6,039.55 balance of an escrow account to be
provided for in the purchase agreement. Under the Settlement, the
Company agreed to pay to Re-Prod, Inc. the balance of the purchase price
of $400,000, of which all but the last installment of $62,500, due on
March 1, 1997, has been paid. The Company must make additional payments
to Re-Prod, Inc. on September 1, 1997 of $300,000 plus that amount equal
to one-half of the excess (if any) of the closing value of Re-Prod,
Inc.'s shares of the Company's common stock (based upon the mean between
the bid/asked price) on September 1, 1997 over $300,000 (payable upon
the tender of Re-Prod, Inc.'s certificates). (As a result of its May,
1996 1-for-15 reverse stock split, the Company issued to Re-Prod, Inc
certificates for 50,000 new shares in exchange for its existing
certificate for 750,000 pre-split shares of common stock.) A stockholder
and officer of the Company ("the Guarantors") have unconditionally
guaranteed the prompt and full payment and performance of all of the
Company's obligations under the Settlement.
Under the purchase agreement, the Company granted Re-Prod, Inc. a
security interest in certain of the Company's assets. The Settlement
provides that Re-Prod, Inc. will subordinate its security interest to
that of any third party which lends the Company funds to repay its
obligations to Re-Prod, Inc. under the Settlement. If the Company is in
default in making any payment due or performing any obligation required
under the Settlement, Re-Prod, Inc. will have the right to apply to the
Court for entry of judgment against the company, and the Guarantors,
jointly and severally, for $1,100,000 less any sums previously paid to
Re-Prod, Inc. under the Settlement. Upon full satisfaction by the
Company of its obligations under the Settlement and the Asset Purchase
Agreement, Re-Prod, Inc.'s counter claim will be dismissed. The
accompanying balance sheet includes an accrual of $1,035,698 as Accrued
Acquisition Litigation Settlement to reflect this liability as of June
30, 1996. This liability was assumed by DPC as part of its purchase of
Remarkable as disclosed in Note 7.
9 - Lease Expense and Lease Commitments
The Company, through its wholly-owned subsidiary, Remarkable, is
obligated for leases of two sections of space in an industrial park in
Monsey, New York. The minimum annual rent for the space is as follows:
1997 $ 21,269
1998 11,235
----------
$32,504
==========
Continued
F-16
<PAGE>
Rent expense relating to operating leases amounted to $35,000 for the
year ended June 30, 1996.
10 - Warrants and Stock Options
As of June 30, 1996, the Company had the following warrants and stock
options outstanding:
<TABLE>
<CAPTION>
Shares Price Per Share Expiration Date
--------------------------------------------------------
<S> <C> <C> <C>
Private placement warrants 240,000 $1.50 October 31, 1998
Stock options held by officer 66,667 3.00 September 8, 1998
Stock options held by shareholder 66,667 3.00 September 8, 1998
--------
373,334
========
</TABLE>
All of the above shares and price per share reflect the 15-to-1 reverse
stock split on May 3, 1996.
11 - Concentrations
V.W. Eimicke, Ltd. and V.W. Eimicke Associates, Inc. (collectively
"Eimicke") is Remarkable's largest customer and accounts for
approximately 10% of Remarkable's sales. The Company has contracts with
Eimicke which (i) make Eimicke the sole distributor of Remarkable
products in Canada, (ii) make Remarkable the exclusive manufacturer of
laminated Federal law posters sold by Eimicke in the United States and
(iii) make Eimicke a non-exclusive distributor of a series of
re-markable planning boards and other related products in the United
States. Each of these contracts is dated September 6, 1990 and expires
November 30, 1996, and there is no assurance that this customer will
continue to purchase the Company's products on similar terms. The loss
of this customer, if it occurs, could have a material adverse effect on
the Company's business.
12 - Related Party Transactions
In September, 1995, the Company executed a letter of intent to purchase
all of the issued and outstanding stock of Nexim Corp., a Nevada
Corporation, ("Nexim"), 100% of which is owned by Mr. Andrew Jaloza who
became a director of the Company in January, 1996. Upon the execution of
the letter of intent, the Company paid Mr. Jaloza $100,000 as a down
payment for the purchase of Nexim. Nexim owns a technology known as
Medphone, a medical device product. The Company also invested,
approximately, an additional $62,000 toward development of this product.
Nexim has had no revenues and is not an operating company. In April,
1996, the Company decided not to pursue the acquisition of Nexim. The
ultimate recovery of the invested funds is uncertain. During the year
ended June 30, 1996, the Company wrote off its entire investment in this
venture, which is included in general and administrative expenses.
Richard Greene, the Company's former President and legal counsel
received 100,000 shares of the Company's common stock in full payment of
legal services previously rendered to the Company. These shares were
registered for Mr. Greene pursuant to a Form S-8 filed with the
Securities and Exchange Commission on September 18, 1995.
F-17
