SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
September 28, 2000
GOURMET GROUP, INC.
(formerly, Seair Group, Inc.)
-------------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA 33-55254-10 87-0438825
------ ----------- ----------
State of Commission IRS Employer
Incorporation File Number I.D. Number
1 CHISHOLM TRAIL, BUDA, TEXAS 78610
-----------------------------------
Address of principal executive offices
Registrant's telephone number: (512) 295-4600
--------------
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial statements of businesses acquired.
The financial statements of Our Food Products Group, Inc. ("Our Food"),
which were to be filed by amendment to the Registrant's Current Report on Form
8-K, dated October 12, 2000, are filed herewith.
c. Exhibits.
Exhibits were filed with the Registrant's Current Report on Form 8-K, dated
October 12, 2000.
Item 8. CHANGE IN FISCAL YEAR
The Registrant has changed its fiscal year end from December 31st to June
30th to conform to the fiscal year end of Our Food (the acquiror for accounting
purposes in the Share Exchange).
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Dated: November 20, 2000
GOURMET GROUP, INC.
By: /s/ Fredrick Schulman
-----------------------------------------
Fredrick Schulman
President and Chief Executive Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE(S)
-------
OUR FOOD PRODUCTS GROUP, INC.:
Report of Independent Public Accountants 2
Balance Sheets as of June 30, 1999 and 2000 3
Statements of Operations for the Years
Ended June 30, 1999 and 2000 4
Statements of Stockholders' Equity for the
Years Ended June 30, 1999 and 2000 5
Statements of Cash Flows for the Years
Ended June 30, 1999 and 2000 6
Notes to Financial Statements 7-17
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Our Food Products Group, Inc.,
d.b.a. Jardine Foods:
We have audited the accompanying balance sheets of Our Food Products Group,
Inc., d.b.a. Jardine Foods (a Texas corporation), as of June 30, 1999 and 2000,
and the related statements of operations, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Our Food Products Group, Inc.,
d.b.a. Jardine Foods, as of June 30, 1999 and 2000, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Austin, Texas
November 13, 2000
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<PAGE>
OUR FOOD PRODUCTS GROUP, INC.
D.B.A. JARDINE FOODS
BALANCE SHEETS--JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,612 $ 73,629
Trade accounts receivable, net 881,313 777,494
Inventories, net 604,691 546,788
Prepaid expenses and other current assets 175,472 153,093
----------- -----------
Total current assets 1,675,088 1,551,004
PROPERTY AND EQUIPMENT, net 1,814,143 1,801,481
GOODWILL, net 2,954,979 2,798,800
OTHER ASSETS, net 165,404 457,816
----------- -----------
Total assets $ 6,609,614 $ 6,609,101
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 358,623 $ 353,904
Accrued expenses 536,225 303,412
Current portion of long-term debt 169,329 139,033
----------- -----------
Total current liabilities 1,064,177 796,349
LONG-TERM DEBT, less current portion 3,638,568 3,624,433
OTHER LONG-TERM LIABILITIES 263,627 164,549
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; 50,000,000 shares authorized; 16,415,144 and
24,012,420 shares issued and outstanding, respectively 16,415 24,012
Additional paid-in capital 2,151,826 3,348,563
Accumulated deficit (524,999) (1,348,805)
----------- -----------
Total stockholders' equity 1,643,242 2,023,770
----------- -----------
Total liabilities and stockholders' equity $ 6,609,614 $ 6,609,101
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
OUR FOOD PRODUCTS GROUP, INC.
D.B.A. JARDINE FOODS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
NET SALES $ 7,404,720 $ 7,220,485
COST OF SALES 4,958,992 4,974,122
----------- -----------
GROSS PROFIT 2,445,728 2,246,363
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,619,683 2,622,023
----------- -----------
LOSS FROM OPERATIONS (173,955) (375,660)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (428,967) (456,277)
Accretion of value of put warrants (4,696) (9,514)
Other, net 12,391 51,554
----------- -----------
(421,272) (414,237)
----------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM (595,227) (789,897)
EXTRAORDINARY LOSS, early extinguishment of debt -- (33,909)
----------- -----------
NET LOSS $ (595,227) $ (823,806)
=========== ===========
Net loss per share-basic $ (.04) $ (.04)
=========== ===========
Average shares outstanding-basic 16,415,144 20,540,422
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
OUR FOOD PRODUCTS GROUP, INC.
D.B.A. JARDINE FOODS
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 16,415,144 $ 16,415 $ 2,151,826 $ 70,228 $ 2,238,469
Net loss -- -- -- (595,227) (595,227)
----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1999 16,415,144 16,415 2,151,826 (524,999) 1,643,242
Issuance of stock 6,041,937 6,042 657,192 -- 663,234
Issuance of stock to a related party in exchange
for stock in another corporation 2,199,697 2,200 347,800 -- 350,000
Issuance of stock upon conversion of note payable
to majority stockholder 455,491 455 99,545 -- 100,000
Exercise of stock options 78,560 78 172 -- 250
Cancellation of common stock (1,178,409) (1,178) 710 -- (468)
Capital contribution from majority stockholder -- -- 91,318 -- 91,318
Net loss -- -- -- (823,806) (823,806)
----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 2000 24,012,420 $ 24,012 $ 3,348,563 $(1,348,805) $ 2,023,770
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
OUR FOOD PRODUCTS GROUP, INC.
D.B.A. JARDINE FOODS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (595,227) $ (823,806)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 269,408 276,283
Accretion of value of put warrants 4,696 9,514
Extraordinary loss -- 33,908
Changes in operating assets and liabilities, net of effects of acquisitions-
Accounts receivable, net (1,385) 103,819
Inventories, net (45,651) 57,903
Prepaid expenses and other assets (130,504) 80,625
Accounts payable 158,203 (4,719)
Accrued expenses and other (5,932) (233,031)
----------- -----------
Net cash used in operating activities (346,392) (499,504)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (80,109) --
Purchases of property and equipment (99,589) (90,942)
----------- -----------
Net cash used in investing activities (179,698) (90,942)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements 512,412 2,787,245
Principal payments under debt agreements (111,851) (2,840,268)
Cash paid for financing costs -- (51,066)
Proceeds from issuances of stock -- 663,234
Capital contribution by majority stockholder -- 91,318
----------- -----------
Net cash provided by financing activities 400,561 650,463
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (125,529) 60,017
CASH AND CASH EQUIVALENTS, beginning of year 139,141 13,612
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 13,612 $ 73,629
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 426,071 $ 445,582
Issuance of stock for stock of another corporation -- 350,000
Conversion of note payable to stock -- 100,000
Noncash additions to goodwill 431,135 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
OUR FOOD PRODUCTS GROUP, INC.
D.B.A. JARDINE FOODS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
1. BUSINESS AND BASIS OF PRESENTATION:
Our Food Products Group, Inc., d.b.a. Jardine Foods (the Company), a Texas
corporation, manufactures and markets a variety of high-quality specialty
salsas, sauces, salad dressings and condiments to grocery, gourmet and gift
retailers throughout the United States and in a number of foreign countries. The
products are marketed under the D. L. Jardine Special Edition, Jardine 7J Ranch,
W. B. Williams, Shotgun Willie's, Buckaroo and Sontava labels. The Company also
manufactures and distributes private label products to: Dayton Hudson/Marshall
Fields, Harry and David, Longaberger, Disney, Williams Sonoma, Crate and Barrel,
Omaha Steaks and other customers.
The Company was formed on May 18, 1998, for the purpose of acquiring the assets
of Amigos First Partners, LP (Amigos), which was the company that had previously
operated the business described above. The Company acquired Amigos on May 18,
1998, for approximately $5.6 million cash. On October 13, 1998, the Company
acquired the assets and assumed substantially all of the liabilities of Best of
the West, Inc., and Simple Times, Inc. (collectively referred to herein as Best
of the West). The Company agreed to pay in cash an amount equal to 10 percent of
the revenues derived from Best of the West's products over a four-year period,
not to exceed $300,000. The purchase price, however, is not to be less than
$150,000. Best of the West's operations prior to the acquisition were not
significant, therefore, pro forma presentation of combined results had Best of
the West been acquired on July 1, 1998, is not considered meaningful and has
been omitted. The Company accounted for the acquisitions of Amigos and Best of
the West under the purchase method of accounting with the results of operations
from the acquired businesses included in the Company's results of operations
from the dates of the acquisitions. The Company recorded a combined purchase
price of approximately $6.3 million for Amigos and Best of the West.
On September 28, 2000, all of the outstanding stock of the Company was acquired
by Seair Group, Inc. (Seair), a publicly traded shell corporation, in exchange
for 3.142424 shares of Seair common stock for each share of the Company's common
stock. (Immediately prior to this acquisition, each outstanding share of the
Company's preferred stock was automatically converted to approximately 1.45
shares of the Company's common stock.) In addition, outstanding options to
purchase common stock of the Company were exchanged for options to purchase
Seair common stock based on the exchange ratio discussed above. Concurrent with
the acquisition, Seair's name was changed to Gourmet Group, Inc.
The acquisition was accounted for as a recapitalization of the Company for
financial reporting and accounting purposes, therefore, the Company is
considered the predecessor company. As such, the capital accounts in the
accompanying balance sheets, including all share information presented in the
notes to financial statements (except for certain put warrants discussed in
Note 5), have been reflected on an equivalent share basis to give effect to the
exchange ratio discussed above. Seair did not have significant operations prior
to the acquisition, therefore, pro forma presentation of combined results of
operations for the periods presented is not considered meaningful and has been
omitted.
Since inception, the Company has not generated net income nor positive cash
flows from operations, and the Company has been and continues to be dependent on
debt financing and support from its majority stockholder. Management believes
that the Company will be successful in the marketing of its products and that
its capital resources are sufficient to sustain its operations. In addition, the
Company's majority stockholder is committed under an agreement with the
Company's primary lender to fund the Company's losses for specified periods. See
further discussion of this commitment in Note 4.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers cash invested in highly liquid financial instruments with
an original maturity of three months or less to be cash equivalents.
-7-
<PAGE>
INVENTORIES
The Company's inventories are stated at the lower of standard cost or market
which approximates the first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. Major renewals and
betterments are charged to the property accounts while replacements, maintenance
and repairs which do not improve or extend the lives of the respective assets
are expensed when incurred. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the statement of
operations.
GOODWILL
The excess of the purchase price paid over the fair value of net assets acquired
of Amigos and Best of the West is recorded as goodwill and is amortized using
the straight-line method over 20 years, which is the period to be benefited.
LONG-LIVED ASSETS
On an annual basis, the Company reviews the values assigned to long-lived
assets, such as property and equipment and goodwill, to determine if any
impairments are other than temporary. Provisions for asset impairments are based
on discounted cash flow projections in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and such assets
are written down to their estimated fair values. Management believes that the
long-lived assets in the accompanying balance sheets are properly valued.
REVENUE RECOGNITION
The Company recognizes revenue on sales of products on the date of shipment to
the customer and when collection is reasonably assured. Sales returns were not
significant for the years ended June 30, 1999 and 2000. Revenues also include
amounts billed to customers for shipping and handling. Related shipping and
handling costs are reflected within cost of sales.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising costs for
the years ended June 30, 1999 and 2000, were approximately $98,000 and $82,000,
respectively.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options as permitted under SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25, no
compensation expense has been recognized in the accompanying financial
statements because the Company's option grants were made at prices equal to or
in excess of the fair value of the underlying stock at the dates of grant as
determined by the board of directors.
-8-
<PAGE>
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement prescribes the use of the
liability method whereby deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
LOSS PER SHARE
Loss per share has been calculated in accordance with the provisions of SFAS No.
128, "Earnings Per Share." The basic loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding during the
year. Due to the Company's net loss, diluted loss per share has not been
presented since the effect of considering outstanding common share equivalents
would be antidilutive. Options and warrants to purchase 3,239,952 and 1,431,550
shares of common stock, respectively, were outstanding at June 30, 2000, but
were not included in the computation of loss per share as their effect would be
antidilutive.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade receivables. Concentration of credit risk
with respect to trade receivables is limited because a large number of
geographically diverse customers make up the Company's customer base, thus,
spreading the trade credit risk. The Company controls credit risk by performing
credit evaluations on all new customers and requires advance payments, if deemed
necessary.
FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, accounts receivable, accounts payable
and accrued expenses approximate fair value due to the short-term nature of
these instruments. The fair values of all long-term debt and long-term
liabilities were estimated by discounting the future cash flows using market
interest rates. Such fair values do not differ significantly from the carrying
amounts.
RECENT PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," as amemded, which is effective no later than the quarter ending
June, 2001. SAB No. 101 clarifies the SEC's views regarding recognition of
revenue. Management does not believe SAB No. 101 will have a significant impact
on the Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. DETAIL OF CERTAIN BALANCE
SHEET ACCOUNTS:
Trade accounts receivable, net, consisted of the following:
<TABLE>
<CAPTION>
June 30
----------------------
1999 2000
--------- ---------
<S> <C> <C>
Trade accounts receivable $ 956,780 $ 819,844
Less- Allowance for uncollectible accounts (75,467) (42,350)
--------- ---------
Trade accounts receivable, net $ 881,313 $ 777,494
========= =========
-9-
<PAGE>
</TABLE>
Activity in the Company's allowance for uncollectible accounts consisted of the
following:
<TABLE>
<CAPTION>
For the Year
Ended June 30
---------------------
1999 2000
-------- --------
<S> <C> <C>
Balance, beginning of year $ 43,859 $ 75,467
Additions to selling, general and administrative expenses 32,705 5,000
Deductions for uncollectible receivables written off
and recoveries (1,097) (38,117)
-------- --------
Balance, end of year $ 75,467 $ 42,350
======== ========
</TABLE>
Inventories, net, consisted of the following:
<TABLE>
<CAPTION>
June 30
------------------------
1999 2000
----------- ----------
<S> <C> <C>
Raw materials and packaging $ 321,793 $ 323,016
Finished goods 318,898 236,706
Less - Inventory reserve (36,000) (12,934)
---------- ---------
Inventories, net $ 604,691 $ 546,788
========== =========
</TABLE>
Activity in the Company's inventory reserve consisted of the following:
<TABLE>
<CAPTION>
For the Year
Ended June 30
---------------------
1999 2000
-------- ---------
<S> <C> <C>
Balance, beginning of year $ 15,000 $ 36,000
Additions to cost of sales 21,000 52,216
Deductions for inventory written off -- (75,282)
-------- ---------
Balance, end of year $ 36,000 $ 12,934
======== =========
-10-
<PAGE>
</TABLE>
Property and equipment, net, consisted of the following:
<TABLE>
<CAPTION>
June 30
Life in -----------------------------
Years 1999 2000
----- ------------- -------------
<S> <C> <C> <C>
Building 30 $ 1,227,572 $ 1,227,572
Vehicles and equipment 5 265,547 350,414
Land -- 247,578 247,578
Building improvements 30 96,568 100,820
Computer equipment 3 53,052 54,333
Furniture and fixtures 7 49,115 49,657
Other -- 3,500 20,000
------------- ------------
1,942,932 2,050,374
Less-Accumulated depreciation and amortization (128,789) (248,893)
------------- ------------
Property and equipment, net $ 1,814,143 $ 1,801,481
============= ============
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1999 and
2000, was approximately $117,000 and $123,000, respectively.
Goodwill, net, consisted of the following:
<TABLE>
<CAPTION>
June 30
---------------------------
1999 2000
------------ ------------
<S> <C> <C>
Goodwill $ 3,123,582 $ 3,123,582
Less- Accumulated amortization (168,603) (324,782)
------------ ------------
Goodwill, net $ 2,954,979 $ 2,798,800
============ ============
</TABLE>
Amortization expense for the years ended June 30, 1999 and 2000, was
approximately $152,000 and $156,000, respectively.
Other assets, net, consisted of the following:
<TABLE>
<CAPTION>
June 30
----------------------
1999 2000
-------- --------
<S> <C> <C>
Noncompete agreements, net of accumulated amortization of
$53,771 and $92,750, respectively $ 39,229 $ 250
Deferred loan costs, net of accumulated amortization of
$37,096 and $37,413, respectively 115,419 98,347
Investment -- 350,000
Other, net 10,756 9,219
-------- --------
$165,404 $457,816
======== ========
</TABLE>
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<PAGE>
NONCOMPETE AGREEMENTS
In connection with the acquisition of Amigos, the Company obtained noncompete
agreements from certain individuals covering a two-year period. The amounts paid
for the noncompete agreements are being amortized over the life of the
agreements. Amortization expense for the years ended June 30, 1999 and 2000, was
approximately $46,250 and $39,000, respectively.
DEFERRED LOAN COSTS
Deferred loan costs consist of amounts paid in connection with obtaining various
notes payable. The Company is amortizing the costs to interest expense over the
lives of the related notes using the straight-line method, which approximates
the effective interest method. During fiscal 2000, the Company refinanced
certain of its notes payable and recorded an extraordinary charge of
approximately $34,000 related to the write-off of unamortized deferred loan
costs associated with the refinanced notes payable. The Company incurred
approximately $51,000 of loan costs related to obtaining the new notes. This
amount was recorded as deferred loan costs. Amortization expense for the years
ended June 30, 1999 and 2000 (exclusive of the extraordinary charge), was
approximately $36,000 and $34,000, respectively.
INVESTMENT
In fiscal 2000, the Company issued 2,199,697 shares of its common stock to a
related party in exchange for that related party's ownership of 153,000 shares
of the common stock of an unrelated corporation. Management of the Company
recorded the value of the investment at the amount they believed to be the fair
value of the shares received on the date the transaction was consummated. Such
fair value was based on the amount the related party paid for the 153,000
shares. The investment is being accounted for under the cost method of
accounting.
4. LONG-TERM DEBT:
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30
-----------------------------
1999 2000
----------- -----------
<S> <C> <C>
Various notes and line of credit payable to a financial institution; the line of
credit maturing in May 2000 and the notes maturing in May 2002; bearing
interest at the financial institution's prime rate or 8.5% per annum; payable
in monthly installments of principal and interest; collateralized by all
assets of the Company; refinanced in May 2000 $ 1,957,897 $ --
Line of credit of $2 million with a financial institution; maturing May 31,
2003; bearing interest at prime plus 1.5% (11.0% at June 30, 2000), due
monthly; collateralized by all property, equipment, intangibles, inventory,
receivables, investments and deposits of the Company and subject to certain
borrowing base limits; approximately $170,000 of borrowings available at
June 30, 2000 -- 680,466
Note payable to a financial institution in monthly installments of principal and
interest of $2,292 through May 31, 2003; bearing interest at prime plus 1.5%
(11.0% at June 30, 2000); collateralized by all property, equipment,
intangibles, inventory, receivables, investments and deposits of the Company. -- 110,000
Note payable to a financial institution in monthly installments of principal and
interest of $6,794 through May 31, 2003 and annual installments of principal
of $30,000 due at December 31; bearing interest at prime plus 1%;
collateralized by all property, equipment, intangibles, inventory,
receivables, investments and deposits of the Company. -- 1,223,000
Note payable to a third party; due May 15, 2003; bearing interest at 13.5% per
annum; payable monthly; collateralized by all property, equipment,
intangibles, inventory, receivables, investments and deposits. All liens on
the collateral are subordinated to the liens granted to the senior lender 1,750,000 1,750,000
Note payable to a related party; due May 20, 1999; bearing interest at 10% per annum,
payable quarterly; unsecured; converted to preferred stock subsequent to year-end 100,000 --
----------- -----------
3,807,897 3,763,466
Less- Current portion (169,329) (139,033)
----------- -----------
$ 3,638,568 $ 3,624,433
=========== ===========
</TABLE>
-12-
<PAGE>
In connection with obtaining the line of credit and notes payable to a financial
institution, the Company's majority stockholder agreed to make payments to the
Company equal to the net loss (as defined) generated by the Company for any
month. The payments can be made by purchasing subordinated notes from the
Company or by purchasing common stock. The majority stockholder is obligated to
make such payments no later than the tenth day after the end of the month
immediately following the end of the month in which the net loss was generated,
and must continue to make such payments until the Company has achieved net
income (as defined) for six consecutive months. As a result of this arrangement
the majority stockholder was required to make a payment of approximately $68,000
at June 30, 2000, related to the months of May and June 2000. $36,000 of this
payment and a payment of approximately $50,000 for the month of July 2000 have
not been made as of November 13, 2000, the financial institution has waived such
noncompliance and has permitted the majority stockholder to purchase certain
manufacturing equipment on the Company's behalf. The cost of such equipment is
approximately equal to the required payment.
The above line of credit and notes require the maintenance of certain financial
ratios. The Company was in default of certain of these covenants as of June 30,
2000, but has obtained waivers for such noncompliance as of June 30, 2000, and
through September 30, 2000.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2001 $ 139,033
2002 139,033
2003 3,485,400
Thereafter -
</TABLE>
5. STOCKHOLDERS' EQUITY:
COMMON STOCK
The Company has 50,000,000 authorized shares of common stock. During fiscal
1999, an officer of the Company resigned. In connection with that resignation,
the officer forfeited 1,178,409 unvested restricted shares. At June 30, 2000,
58,920 shares of the outstanding common stock remain restricted. The restricted
stock vests ratably over four years.
STOCK OPTIONS
The Company's 1998 Long-Term Incentive Plan (the Plan) was established on
December 1, 1998, to promote the interests of the Company by providing
employees, nonemployee board members and consultants with the opportunity to
acquire or increase proprietary interest in the Company as an incentive to
remain in the service of the Company.
The Plan allows for the grant of options to purchase shares of common stock and
the issuance of common stock directly to eligible persons. The Plan provides for
the options to be either incentive options or nonstatutory options and for the
issuance of up to approximately 2.2 million (700,000 on a pre-conversion basis)
shares of common stock over the term of the Plan. The exercise price per share
of incentive options shall not be less than 100 percent of the fair market value
of the shares of common stock. Fair market value shall be determined by the plan
administrator, which is currently the board of directors. Vesting is generally
ratable over a four-year period but, in no event, more than 10 years (the
maximum term of the option).
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<PAGE>
The Plan provides the grantee the right to exercise prior to vesting. Options
exercised prior to an employee becoming fully vested in such options are subject
to repurchase by the Company should the employee be terminated or leave the
employ of the Company prior to becoming fully vested in such options.
Had compensation cost for all stock option grants been determined based on their
fair value at the grant dates consistent with the method prescribed by SFAS No.
123, the Company's net loss would not be impacted by a material amount.
The fair value of each option grant on the dates of grant was estimated using
the Black-Scholes Option Pricing Model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Risk-free interest rate 5.8% 6.0%
Dividend yield 0.0% 0.0%
Expected volatility near 0.0% near 0.0%
Expected life 10 years 10 years
</TABLE>
A summary of the status of the Company's stock option plan is presented below:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------
1999 2000
------------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year -- $ -- 501,217 $.003
Granted-
At market 501,217 .003 105,271 .003
Above market -- -- 3,004,157 .16
Exercised -- -- (78,560) .003
Forfeited -- -- (289,103) --
-------- ---------
Outstanding and exercisable, end of year 501,217 .003 3,242,982 .15
======== =========
Options vested, end of year -- -- 33,388 .003
======== =========
Weighted average fair value of options granted
during the period, at and above market .003 .15
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------
Weighted
Average
Remaining
Exercise Contractual Options
Prices Number Life (Years) Exercisable
------ ------ ------------ -----------
<S> <C> <C> <C>
$.003 238,825 8.97 33,388
.08 549,924 9.49 --
.16 1,904,309 9.49 --
.24 549,924 9.79 --
----- --------- ---- -------
3,242,982 33,388
========= =======
</TABLE>
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<PAGE>
PUT WARRANTS
In connection with the issuance of the note payable to a third party on May 15,
1998 (see Note 4), the Company issued warrants to acquire 455,556 shares of
common stock at $.01 per share. The number of shares and the exercise price per
share are not reflected on an equivalent share basis (see Note 1) as the
warrants are only exercisable for shares in the Company. Such warrants are
exercisable at any time from the date of issuance until May 15, 2006.
Additionally, provided that any portion of the indebtedness evidenced by the
aforementioned note is outstanding on the following dates, the number of shares
acquirable under the warrants shall be increased to the amounts set forth below:
<TABLE>
<S> <C>
May 15, 2001 559,091 shares
May 15, 2002 667,433 shares
</TABLE>
The warrants can be put to the Company for cash on the earlier to occur of five
years from the date the warrants were issued or the date on which all of the
related indebtedness is paid. The amount payable by the Company would be based
on the per share fair market value of the Company's common stock at the date the
warrants were put to the Company. The following summarizes the change in the
estimated redemption amount through June 30, 2000:
<TABLE>
<S> <C>
Balance, June 30, 1998 $ 7,182
Change during 1999 4,696
--------
Balance, June 30, 1999 11,878
Change during 1999 9,514
--------
Balance, June 30, 2000 $ 21,392
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases certain items of office equipment under operating leases
expiring at various dates through 2000. Terms of these agreements generally
range from one to two years and may include renewal options for various terms of
up to five years. Total rental expense for the years ended June 30, 1999 and
2000, was approximately $18,900 and $41,100, respectively.
The minimum rental commitments under all operating leases with initial or
remaining terms of more than one year are as follows:
<TABLE>
<S> <C>
2001 $ 48,560
2002 33,666
2003 19,560
2004 1,614
</TABLE>
LITIGATION
From time to time, the Company is party to various claims in the normal course
of business. Management believes that the outcome of any matter will not have a
material impact to the Company's financial statements.
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<PAGE>
7. INCOME TAXES:
No federal or state income tax expense has been reflected in the accompanying
statements of operations since the Company has not generated income for
financial reporting or tax purposes. No tax benefit has been reflected related
to the Company's losses due to uncertainties regarding the use of those losses
in future periods.
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory rate of 34 percent to loss before income taxes as
follows:
<TABLE>
<CAPTION>
For the Year
Ended June 30
1999 2000
----------- -----------
<S> <C> <C>
Benefit at the statutory rate $ (217,334) $ (279,239)
Increase (decrease) resulting from-
Permanent differences, primarily meals
and entertainment, and other 63,353 34,112
State income tax, net of federal benefit (16,563) (21,813)
Change in valuation allowance 170,544 266,940
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
<TABLE>
<CAPTION>
June 30
1999 2000
--------- ---------
<S> <C> <C>
Deferred income tax assets-
Capitalized costs $ 37,149 $ 37,149
Reserves and accrued expenses 32,252 26,686
Net operating loss carryforwards 166,485 482,507
Other 14,690 --
--------- ---------
Total deferred income tax assets 250,576 546,342
--------- ---------
Deferred income tax liabilities-
Asset basis (35,669) (64,495)
--------- ---------
Total deferred income tax liabilities (35,669) (64,495)
--------- ---------
Net deferred tax assets 214,907 481,847
Less- Valuation allowance (214,907) (481,847)
--------- ---------
$ -- $ --
========= =========
</TABLE>
The Company has placed a valuation allowance against its otherwise recognizable
net deferred tax asset due to uncertainties regarding the realization of these
assets.
The Company has available, at June 30, 2000, unused net operating loss
carryforwards of approximately $1,300,000, which begin to expire in 2019.
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<PAGE>
8. RELATED-PARTY TRANSACTIONS:
The Company has an agreement with a related-party consulting company in which
consulting services will be provided through March 2001. The Company's president
is also the principal of the consulting company. The services provided include
consultation in the area of merger and acquisition opportunities, equity and
debt financing, strategic planning and other aspects of the business. Fees and
expenses paid for these services under the agreement amounted to approximately
$36,000 for the year ended June 30, 2000. The Company believes that the fees
paid and services received were equivalent to those obtainable from an
unaffiliated third party.
In fiscal 2000, the Company issued 2,199,697 shares of its common stock to the
wife of an officer of the Company in exchange for 153,000 common shares owned by
the officer's wife in an unrelated corporation. Management recorded its
investment in these shares at an amount they believed to be the fair market
value of the shares received.
9. EMPLOYEE BENEFIT PLAN:
The Company participates in a defined contribution pension plan covering
substantially all employees who have completed 12 months of service and worked
1,000 hours. At the discretion of the Company, the Company may match up to 25
percent of the employee's contribution up to 6 percent of the participant's
compensation. No employer contributions were made during fiscal 1999 or 2000.
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