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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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
(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
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
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: 271,283.
(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 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
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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 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
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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. 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
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Company and of Remarkable. See "Management - Compensation Pursuant to Plans."
The Company and Remarkable consider relations with their employees to be
excellent. At December 31, 1995, 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"), a 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 which acts
as a telephone based remote defibrilation. The Company has invested
approximately $33,000 toward development of this product. Nexim has no revenues
and is not an operating company. In April 1996, the Company decided not to
pursue the acquisition of Nexim. Nexim has proposed to execute a promissory note
in favor of the Company in the principal amount of $161,894.36, bearing interest
at the prime rate. Nexim will pay interest only for six months commencing two
months after execution of the note and the principal and accrued interest to be
paid in 36 monthly installments thereafter or the initial public offering of
Nexim's securities. Alternatively, Nexim can extinguish the entire note with a
lump sum payment of $81,000 at any time within 90 days of execution of the note.
At June 30, 1996, the Company believes that there is a substantial likelihood
that the Company will collect all are part of this note.
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
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to the Monsey, New York facility, and a third party has sublet and occupied this
space as of April 1, 1996.
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 was purchased from Re-Prod, Inc. did not exist at the time of the
acquisition. As a result the Company has 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
9
<PAGE>
financial guarantees as well as for common law fraud, securities fraud and fraud
and conversion. The 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.
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 March 1, 1996.
The Company has not paid dividends on its Common Stock. The Company intends
to retain any future earnings to finance its growth.
11
<PAGE>
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 year
ended June 30, 1995 and 1996 are presented below for comparative purposes.
The consolidated balance sheet as June 30, 1996 and the statement of
operations for the year ended June 30, 1995 presented below have been derived
from the unaudited financial records 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 resulted of operations for the period presented.
<TABLE>
<CAPTION>
Consolidated Balance Sheet:
Eight Months Ended
Year Ended June 30, 1995
June 30, 1996 (unaudited)
------------- ------------------
<S> <C> <C>
Assets:
Current Assets
Cash & cash equivalents $ 11,950 $ 28,562
Accounts receivable-net of allowance
for doubtful accounts 128,012 -
Inventory 153,037 -
Prepaid Expenses 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
Notes Receivable -
Intangible assets-net of accumulated amortization 933,333 -
Refundable deposits 5,850 4,210
Other 35,114 -
----------- ---------
Total Other Assets 941,817 4,210
Total Assets $ 1,304,964 $ 32,722
=========== =========
Liabilities and Shareholders' Equity:
Current Liabilities
Current maturities of long-term debt $ 255,969 $ -
Accounts payable 102,131 54,522
Accrued and other expenses 48,113 -
Shareholders' loans 45,000 -
----------- ---------
Total Current Liabilities 451,213 54,522
Long-Term Liabilities
Long-term debt 242,642 -
Net liabilities of discontinued operations 188,500 278,540
----------- ---------
Total Liabilities 882,355 333,062
Total Shareholders' Equity (Deficit) (383,641) (300,290)
Total Liabilities and Shareholders' Equity (Deficit) $ 1,304,964 $ 32,772
=========== =========
</TABLE>
12
<PAGE>
Consolidated Statement of Operations:
<TABLE>
<CAPTION>
Eight Months Ended
Year Ended June 30, 1995
June 30, 1996 (Unaudited)
------------- ------------------
<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 (2,222) -
----------- -----------
1,342,737 122,611
----------- -----------
(Loss) from Continuing Operations (552,097) (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)
----------- -----------
Extraordinary Item - forgiveness of debt 34,000 -
----------- -----------
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 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, and the potential recovery of
its investment in the development of Nexim's product 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., resulted in a
reduction of current assets from $28,562 at June 30, 1995 to $328,033 at June
30, 1996, a reduction 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, a reduction 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 further
result of the disposition of the valve divisions, the Company experienced a
reduction of current liabilities from $54,522 at June 30, 1995 to $451,213 at
June 30, 1996, a reduction of 728% or $396,691. The Company also experienced a
reduction of long-term liabilities from $278,540 at June 30, 1995 to $431,142 at
June 30, 1996, a reduction of 55% or $152,601. Shareholders Equity was reduced
from $(300,290) at June 30, 1995 to $(383,641) at June 30, 1996, a reduction of
28% or $83,354.
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
13
<PAGE>
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 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 year ended June 30,
1995. Cost of goods sold was $280,698 and operational expenses were $1,342,737.
Other income of $100,957 was comprised of income from operations of discontinued
subsidiaries of $99,957 and forgiveness of debt of $39,000.
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 $172,891
and proceeds from officer loan of $30,834. 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 April 1996, the Company decided not to pursue its acquisition of Nexim.
Nexim has proposed to execute a promissory note in favor of the Company in the
principal amount of $161,894.36 bearing interest at the prime rate. Nexim will
pay interest only for six months commencing two months after execution of the
note and principal and accrued interest to be paid in 36 monthly installments
thereafter or the initial public offering of Nexim's securities. Alternatively
Nexim can extinguish the entire note with a lump sum payment of $81,000 at any
time. At June 30, 1996 the Company estimated that there is a substantial
likelihood that the Company would collect all or part of this note.
Upon the acquisition of Success, the Company assumed $250,000 of its
aggregate principal indebtedness to
14
<PAGE>
Performance capital at the rate of 10% per annum. See "Certain Transactions."
Performance Capital has since lent the Company an additional $205,000 which will
be converted into common stock of the Company at the rate of $.15 per share.
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 $100,000 during 1996 (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------- --------------------------------------------
Name and Other Annual Restricted Options LTIP All Other
Principal Position Salary Bonus Compensation Stock Awards /SARS Payouts Compensation
($)/(1) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Irwin Schneidmill
Chief Executive Officer
& President(2)
1996 140,000 0 - 0 0 0 0
1995 45,000 0 - 0 0 0 0
1994 0 0 0 0 0 0 0
Bob J. Sudderth
Chairman of the Board,
President & Treasurer(3)
1996 0 0 0 0 0 0 0
1995 0 0 0 0 0 0 0
1994 0 0 0 0 0 0 0
</TABLE>
- ------------
(1) Mr. Schneidmill received no compensation or other benefits from the Company
during fiscal years 1994 and 1995. The amounts reported above for fiscal
year 1995 were paid to Mr. Schneidmill by Success Direct, Inc. which is
currently a wholly owned subsidiary of the Company, but during 1994 and 1995
was owned by a corporation not related to the Company. However, because the
financial results of the Company have been consolidated with those of
Success Direct, Inc. retroactively to July 1994 by reason of common
ownership, compensation and other benefits paid to Mr. Schneidmill by
Success Direct, Inc. have been included in the above table.
(2) Mr. Schneidmill became President and Chief Executive Officer of the Company
in August, 1995.
(3) Mr. Sudderth served as Chairman of the Board, President and Treasurer until
August 1, 1995.
Option/SAR Grants In Last Fiscal Year
The following table sets forth information with respect to option grants during
1996 to the Named Executive Officers.
Percent of Total
Options/SARs
Granted to Exercise
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($) Date
- ---- ------------ ---------------- --------- ----------
Irwin Schneidmill 66,667(1)(2) 100% $.20 9/14/98
- ------------
(1) All options were granted pursuant to a stock option certificate and
agreement dated September 15, 1995, and are non-qualified options receiving
no special tax benefits. The agreement provided for the grant of 1,000,000
options, immediately exercisable, representing the right to purchase
1,000,000 shares of the Company's restricted common stock. The term of the
options is three years from the date of grant. The option price and number
of option shares are adjustable only according to a non-dilution provision.
(2) 66,667 adjusted to reflect a 15 for 1 share reverse stock split, effective
May 1996.
18
<PAGE>
Aggregated Option/SAR Exercises In Last fiscal Year and
F/Y End Option/SAR Values
The following table sets forth information with respect to option exercises ad
fiscal year-end option values for the Named Executive Officers.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Value Number of Unexercised in-the-money
On Acquired Realized Options/SARs at FY-End Options/SARs at FY-End(1)
Name Exercise (%) ($) 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.
19
<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
20
<PAGE>
Formicola, includes 93,316 shares of Common Stock held by Mr. Formicola as a
result of a conversion of 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.
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
21
<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, a 100% of which is owned by Andrew
Jaloza who became a director of the Company in January 1996. Upon the execution
of the letter of intent, the Company paid to Mr. Jaloza $100,000 as a down
payment for the purchase of Nexim. Nexim owns a technology known as Medphone, a
medical device product, to which the Company has invested approximately $33,000
toward its development. The Company has committed to investing an additional
$30,000 for the development of the Medphone technology through June 1996 at
which tie it will reevaluate the acquisition of Nexim.
Richard Greene, the Company's former President and legal counsel received
100,000 shares (6,666 shares, post-split) 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, and Mr. Greene has since disposed of
the shares.
22
<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
23
<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.
24
<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: April 4, 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 April 4, 1997
Irwin Schneidmill and Financial Officer, and
a Director (Principal
Executive and Financial Officer)
/s/Robert Trause Director April 4, 1997
Robert Trause
/s/Mark Wolchock Director April 4, 1997
Mark Wolchock
25
<PAGE>
CELESTIAL VENTURES CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 1996
<PAGE>
To the Board of Directors and Stockholders
Celestial Ventures Corporation
We have audited the accompanying balance sheet of Celestial Ventures
Corporation as of June 30, 1996, and the related statements of operations,
shareholders' (deficit), and cash flows for the year ended June 30, 1996
and the eight months ended June 30, 1995. 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 as of June 30, 1996, and the results of its operations and its
cash flows for the year ended June 30, 1996 and the eight months ended June
30, 1995 in conformity with generally accepted accounting principles.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
October 18, 1996, except for Note 10, as
to which the date is November 12, 1996
F-2
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1996
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
============
See notes to financial statements.
F-3
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1996
Liabilities and Shareholders' (Deficit)
Current Liabilities
Current maturities of long-term debt $ 255,969
Accounts payable 102,131
Accrued and other expenses 48,113
Shareholders' loans 45,000
------------
451,213
------------
Other Liabilities
Long-term debt 242,642
Net liabilities of discontinued operations 188,500
------------
431,142
------------
Total Liabilities 882,355
------------
Redeemable Common Stock - 50,000 shares 806,250
------------
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 4,817,487
Accumulated (deficit) (5,202,476)
------------
Total Shareholders' (Deficit) (383,641)
------------
Total Liabilities and Shareholders' (Deficit) $ 1,304,964
============
See notes to financial statements.
F-4
<PAGE>
CELESTIAL VENTURES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the For the
Year Ended Eight Months Ended
June 30, 1996 June 30, 1995
---------------------------------
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 (2,222) -
-------------- -------------
1,342,737 122,611
-------------- -------------
(Loss) from Continuing Operations (552,097) (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)
-------------- -------------
Extraordinary Item - forgiveness of debt 34,000 -
-------------- -------------
Net (Loss) $ (451,140) $ (2,580,254)
============= =============
Weighted Average Common Shares Outstanding 878,239 383,463
============== =============
(Loss) Per Share $ (.51) $ (6.73)
============== =============
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 878,163 $ 878 517,924 $ 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 878,163 878 660,391 660 4,165,447 (4,467,275) (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 (606,310) (606) 40,421 41 565 - -
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 $ 4,817,487 $ (5,202,476) $ (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 $ -
=========== ==============
Purchase of assets in exchange for:
Note payable $ 250,000 $ -
=========== ==============
Redeemable common stock $ 750,000 $ -
=========== ==============
Shareholder loans converted to common stock $ 25,000 $ -
=========== ==============
Long-term debt converted to common stock $ 179,100 $ -
=========== ==============
Common stock issued for services rendered $ 50,000 $ -
=========== ==============
Interest expense paid through issuance of
common stock $ 13,147 $ -
=========== ==============
Accretion on redeemable common stock $ 56,250 $ -
=========== ==============
</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
subsequently purchased a wholly-owned subsidiary on July 1, 1995, Success
Direct, Inc., which is in the business of Business to Business direct
mail marketing. 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.
Investments in affiliated companies are accounted for using the
equity method.
b. Inventory - Inventory 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. 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.
g. Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the
Continued
F-9
<PAGE>
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.
h. 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,
acquired July 1, 1995, 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
=============
3 - Intangible Assets
As of June 30, 1996, intangible assets, acquired July 1, 1995, 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
=============
Continued
F-10
<PAGE>
4 - Long-Term Debt
At June 30, 1996, long-term debt consists of the following:
Note Payable - Re-prod, Inc. - payable in monthly principal
payments of $10,000 or the amount of monthly list rental income,
whichever is greater - separate monthly interest payments of 9%
of the unpaid principal balance are also due - two of the
Company's shareholders have personally guaranteed the payment of
this note - as of June 30, 1996, the Company has instituted a
lawsuit against Re-prod, Inc. and has stopped making principal
and interest payments - interest has been accrued on the unpaid
principal balance since the last payment was made and the note
has been classified as current $229,448
Notes Payable - Performance Capital - five separate $50,000
notes (dated December, 1994; January, 1995; February, 1995;
March, 1995; and April, 1995) - assumed in connection with the
acquisition of Success Direct, Inc. - 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 - as of
June 30, 1996, interest has only been accrued - no payments have
been made because of a subsequent agreement made to renegotiate
the note payable (see Note 10 - Subsequent Events) 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
--------
$498,611
Less: Current maturities of long-term debt 255,969
--------
$242,642
========
Principal payments required for the five years subsequent to June 30, 1996 are
summarized as follows:
June 30, 1997 $ 255,969
1998 55,091
1999 55,839
2000 53,234
2001 50,561
----------
$ 470,694
==========
Continued
F-11
<PAGE>
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.
6 - Discontinued Operations and Sale of Subsidiaries
During the year ended June 30, 1996 and the period November 1, 1994
through June 30, 1995, the Company's discontinued operations 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>
Continued
F-12
<PAGE>
Effective June, 1994, the Company ceased operations of U.S. Powder
Coaters, Inc. ("USPC"). USPC's principal business consisted of
treating and coating metal and non-metal materials. As part of the
shut-down, the Company wrote off $385,000 of equipment and
negotiated a 50% reduction in debt totaling $170,000. During the
eight months ended June 30, 1995, the Company wrote down $459,192
relating to its production equipment which was deemed worthless. As
of the balance sheet date, the Company has no plans to dispose of
the entity.
In addition, effective May 1, 1995, the Company discontinued the
operations comprising its valve manufacturing and coating businesses. In
connection therewith, the Company sold all its wholly-owned subsidiaries
with the exception of USPC to Turkey Delite, Inc. for promissory notes
and common stock. The subsidiaries consisted of Valves International,
Inc. and Subsidiaries, (Central Valve Services, Inc. and Alloy Valve
International, Inc.) and Gulf Coast Powder Coatings, Inc.
The market for Turkey Delite, Inc.'s common stock is thinly traded
and its market is maintained by one market maker. Additionally, a
shareholder and chief executive officer of Turkey Delite, Inc. was a
shareholder and chief executive officer of the Company as of the
effective date.
After consummating this transaction, management determined that the
ultimate realization of the promissory notes and common stock was
uncertain and fully reserved against these assets at June 30, 1995.
Consequently, the Company incurred a loss on the disposal of these
subsidiaries of $1,498,410.
Since there are uncertainties surrounding the ultimate realization
of any deferred tax assets, the tax benefits from the losses from
discontinued operations and disposal of subsidiaries have been
offset by valuation allowances resulting in no net tax benefit from
these losses.
Net liabilities of discontinued operations are as follows:
Note Payable $ 170,000
Other Liabilities 18,500
----------
$ 188,500
==========
The note payable represents the renegotiated balance due to R.M.
Engineering on a note related to the acquisition of USPC's equipment. The
note is due on demand, bears interest at 4%, and is secured by the
equipment.
Continued
F-13
<PAGE>
7 - Acquisitions
Effective July 1, 1995, the Company consummated a business
combination with Success Direct, Inc. which was accounted for as a
reverse acquisition. (A reverse acquisition is equivalent to the
issuance of stock by Success Direct, Inc. for the net monetary
assets of the Company accompanied by a recapitalization. The
accounting is similar to that of a pooling of interests, in that the
historical cost basis of the purchased entity is used and no
goodwill is recorded.) The acquisition consisted of the Company's
issuance of 66,667 shares of restricted common stock (with a par
value of $.001), in exchange for the outstanding shares of Success
Direct, Inc.
The summarized assets and liabilities of the separate companies on
July 1, 1995, the date of acquisition, were as follows:
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 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.
Continued
F-14
<PAGE>
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.
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 put options (see Note 10 - Subsequent Events).
8 - Reverse Stock Split
On May 3, 1996, the Company effected a 1-for-15 reverse stock split which
is reflected in these financial statements.
9 - Commitments
The Company 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-15
<PAGE>
10 - Subsequent Events
On November 12, 1996, the Company agreed on a settlement with
Re-Prod, Inc. concerning the lawsuit described in Note 7. The
Company has agreed to pay Re-Prod, Inc. approximately $706,000
through September 1, 1997. The Company has paid approximately
$156,000 through November 14, 1996 and will pay further
installments without interest as follows:
December 1, 1996 $ 62,500
January 1, 1997 62,500
February 1, 1997 62,500
March 1, 1997 62,500
September 1, 1997 300,000
----------
$ 550,000
==========
In addition, the Company will pay Re-Prod, Inc. the sum, if any, which is
equal to one-half of the amount by which the September 1, 1997 closing
value (based upon the mean between the bid/asked price) of the Company's
common shares owned by Re-Prod, Inc. exceeds $300,000. Re-Prod, Inc. owns
50,000 shares (post-split) of the common stock of the Company.
In exchange, Re-Prod, Inc. has agreed to release the Company of its
obligations under the promissory note ($229,448 and $17,210 of principal
and accrued interest, respectively) and the Price Put Option Contracts
and Guarantee discussed in Note 7 ($806,250). Re-Prod, Inc. will maintain
its security interest in certain assets of the Company until such time
that Re-Prod, Inc. receives the payments denoted above.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,950
<SECURITIES> 0
<RECEIVABLES> 148,012
<ALLOWANCES> 5,000
<INVENTORY> 153,037
<CURRENT-ASSETS> 328,033
<PP&E> 45,665
<DEPRECIATION> 10,551
<TOTAL-ASSETS> 1,304,964
<CURRENT-LIABILITIES> 451,213
<BONDS> 0
0
272
<COMMON> 1,076
<OTHER-SE> (384,989)
<TOTAL-LIABILITY-AND-EQUITY> 1,304,964
<SALES> 1,071,338
<TOTAL-REVENUES> 1,071,338
<CGS> 280,698
<TOTAL-COSTS> 280,698
<OTHER-EXPENSES> 1,342,737
<LOSS-PROVISION> 552,097
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 66,957
<EXTRAORDINARY> 34,000
<CHANGES> 0
<NET-INCOME> (451,140)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
