SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) July 2, 1996
WATER-JEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other Jurisdiction of Incorporation)
0-13049 13-3006788
(Commission File No.) (I.R.S. Employer Identification No.)
243 Veterans Boulevard Carlstadt New Jersey 07072
of principal executive offices) (zip code)
Registrant's telephone number including area code (201) 507-8300
Item 1. Changes in Control of Registrant
On July 2, 1996, Water-Jel Technologies, Inc. (the "Company") acquired
Journeycraft, Inc., a New York corporation ("JCI"), and Theracom Communications,
Inc., a New York corporation ("THI"). Through its majority-owned subsidiary,
X-ceed Motivation, JCI provides services to major corporations in the field of
performance improvement and internal corporate communications. These services
include developing applications using emerging new media such as Internet sites,
CD-ROMs, and interactive awards catalogs. JCI is also involved in travel
technology and corporate travel management and consulting. THI provides
training, communications and data to the healthcare industry, including programs
to enhance the communications skills of healthcare professionals.
The transaction was consummated by merging wholly owned subsidiaries of
the Company into each of JCI and THI as a result of which JCI and THI became
wholly-owned subsidiaries of the Company. Pursuant to the Agreement and Plan of
Merger dated as of May 17, 1996 (the "Agreement"), in exchange for the merger,
the holders of JCI and THI stock received an aggregate of 3,500,000 shares of
the Company's Common Stock. Prior to this transaction the Company had 3,511,160
shares of Common Stock outstanding.
In connection with the Agreement, Peter Cohen resigned as a director of
the Company and the Board elected Mr. Norman Doctoroff as a director. The
position of Chief Executive Officer of the Company has been assumed by Werner
Haase, a director of the Company and the CEO and principal shareholder of both
JCI and THI. Nurit Kahane Haase, the wife of Werner Haase, was appointed Senior
Vice President of the Company. Under the terms of the Agreement, Mr. Haase has
the right to designate one additional member of the Board as soon as the Company
meets the information requirements in connection therewith in accordance with
the provisions of Section 14(f) of the Securities Exchange Act of 1934.
As a result of this transaction, control of the Company has
effectively passed to Mr. and Mrs. Haase. Mr. and Mrs. Haase now own
2,281,875 shares of the Company's Common Stock, representing approximately
32.5% of the Company's outstanding voting securities. Mr. Haase also holds
options to acquire an additional 243,750 shares of Common Stock of the
Company. Two other former shareholders of JCI acquired in excess of 5% of the
Company's Common Stock as a result of the transaction. These were William
Walters and Seneca Associates, who own approximately 7.1% and 5.7%,
respectively, of the Company's Common Stock outstanding after completion of
the transaction. There are no plans or arrangements whereby either Mr. Walters
or Seneca Associates will participate in the management of the Company.
Reference is made to Item 2 hereof for additional disclosures.
2
Item 2. Acquisition or Disposition of Assets.
On July 2, 1996, the Company acquired JCI and THI by merging wholly
owned subsidiaries into each of JCI and THI. Under the Agreement, the holders of
JCI and THI stock received an aggregate of 3,500,000 shares of the Company's
Common Stock.
The consideration paid by the Company was determined by arm's length
negotiations between JCI and THI and the Company. Mr. Werner Haase, the
principal shareholder of both JCI and THI prior to this transaction, is also a
director of the Company. Mr. Haase represented JCI and THI in the negotiations
and did not participate in the negotiation or evaluation of the transaction by
the Company's Board of Directors.
The Company has received an opinion from A. S. Goldmen & Company,
independent investment bankers, that the amount of stock issued as consideration
in the merger is fair to the Company and its shareholders from a financial point
of view.
Reference is made to Item 1 hereof for additional disclosures.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
Combined financial statements for Journeycraft, Inc. and affiliate for the two
fiscal years ended August 31, 1995 (audited) and as of and for the six months
ended February 29, 1996 (unaudited) are included at pages F-1 to F-12
following the signature page of this report.
(b) Pro Forma Financial Information
Unaudited pro forma condensed combined financials statements for Water-Jel
Technologies, Inc. and Journeycraft, Inc. and affiliate as of and for the six
months ended February 29, 1996 and as of and for the fiscal years ended August
31, 1995 and 1994 are included at pages F-13 to F-21 following the signature
page of this report.
(c) Exhibits
1 Agreement and Plan of Merger dated as of May 17, 1996,
by and among the Company, JCI, THI, JCI Acquisition Corp.,
THI Acquisition Corp. and Werner Haase.
2 Employment Agreement,dated as of July 1, 1996, by and among
the Company and Nurit Kahane Haase.
3 Fairness Opinion of A. S. Goldmen & Company dated May 21,
1996.
3
SIGNATURES
Pursuant to the requirements 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.
WATER-JEL TECHNOLOGIES, INC.
By: /s/ Werner Haase
Werner Haase
Chief Executive Officer
Date: July 12, 1996
4
JOURNEYCRAFT, INC. AND AFFILIATE
REPORT ON AUDITS OF COMBINED FINANCIAL STATEMENTS
TWO YEARS ENDED AUGUST 31, 1995
CONTENTS
Page
Independent auditors' report F-1
Combined balance sheets F-2
Combined statements of income F-3
Combined statement of stockholders' equity F-4
Combined statements of cash flows F-5
Notes to combined financial statements F - 6 - F-12
Independent Auditors' Report
Stockholders
Journeycraft, Inc. and Affiliate
New York, New York
We have audited the accompanying combined balance sheets of Journeycraft, Inc.
and Affiliate as of August 31, 1995 and 1994 and the related combined statements
of income, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Journeycraft, Inc. and
Affiliate as of August 31, 1995 and 1994, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 11, subsequent to year end the Company merged with
Water-Jel Technologies, Inc. Further, as discussed in Note 2 to the financial
statements, the Company changed its method of accounting for certain investments
in equity securities.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
June 28, 1996 (except for Note 11, as
to which the date is July 2, 1996)
F-1
JOURNEYCRAFT, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
August 31,
--------------------- February 29,
1995 1994 1996
---- ---- ----
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,552,297 $ 2,322,947 $ 3,934,314
Accounts receivable 1,174,029 915,330 1,087,805
Deferred income taxes (Note 7) 54,000 107,250 -
Prepaid expenses and other
current assets 160,962 - 161,443
----------- ----------- -----------
Total current assets 5,941,288 3,345,527 5,183,562
PROPERTY AND EQUIPMENT, net (Note 3) 721,814 767,097 742,646
INVESTMENT IN MARKETABLE SECURITIES - 146,042 -
INVESTMENT IN MARKETABLE SECURITIES,
at fair value (Note 2) 294,311 - 370,520
DEFERRED INCOME TAXES (Note 7) 589,000 576,000 597,870
DUE FROM STOCKHOLDER (Note 4) 1,297,483 1,273,014 1,247,483
NOTE RECEIVABLE (Note 5) 155,000 - 155,000
OTHER ASSETS (Note 6) 168,641 111,518 190,105
----------- ----------- -----------
$ 9,167,537 $ 6,219,198 $ 8,487,186
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,659,685 $ 1,166,862 $ 1,687,743
Notes payable, bank - 675,000 -
Income taxes payable, current 1,051,149 170,505 1,026,837
Customer billings in excess of program costs 2,664,431 1,846,182 2,002,353
Accrued lease obligation (Note 8) 160,000 318,000 -
Other current liabilities 34,448 66,014 28,799
----------- ----------- -----------
Total current liabilities 5,569,713 4,242,563 4,745,732
----------- ----------- -----------
LONG-TERM ACCRUED LEASE OBLIGATION (Note 8) 760,000 691,000 778,000
----------- ----------- -----------
INTEREST OF MINORITY STOCKHOLDER 179,236 95,755 236,384
----------- ----------- -----------
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY (Note 9):
Common stock, no par value; 200 shares
authorized, issued and outstanding
158.65,100, and 158.65, respectively 244,000 19,000 244,000
Common stock, no par value; 200 shares
authorized, issued and outstanding 20,
20 and 30, respectively 1,000 1,000 1,000
Additional paid-in capital 48,882 225,000 48,882
Unrealized gain on investments reported
at fair value 75,960 - 36,120
Retained earnings 2,288,746 944,880 2,397,068
----------- ----------- -----------
Total stockholders' equity 2,658,588 1,189,880 2,727,070
----------- ----------- -----------
$ 9,167,537 $ 6,219,198 $ 8,487,186
=========== =========== ===========
See accompanying notes to combined financial statements
F-2
JOURNEYCRAFT, INC. AND AFFILIATE
COMBINED STATEMENTS OF INCOME
Six Months Ended
Years Ended August 31, ----------------------------
---------------------- February 29, February 28,
1995 1994 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
REVENUES:
Program revenues $ 27,946,825 $ 27,456,133 $ 19,150,210 $ 11,380,239
Airline commission revenues 10,539,398 8,989,152 5,147,889 4,793,896
------------- ------------ ------------ ------------
38,486,223 36,445,285 24,298,099 16,174,135
------------- ------------ ------------ ------------
OPERATING EXPENSES:
Direct program costs 22,902,666 22,869,359 16,134,384 9,122,407
Selling and promotion expenses 8,337,392 8,152,764 4,729,207 3,960,491
General and administrative expenses 4,715,811 5,335,368 3,273,986 2,455,713
Loss on investment impairment (Note 10) - 808,433 - -
------------- ------------ ------------ ------------
35,955,869 37,165,924 24,137,577 15,538,611
------------- ------------ ------------ ------------
OPERATING INCOME (LOSS) 2,530,354 (720,639) 160,522 635,524
------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and dividend income 65,428 20,854 90,112 17,003
Interest expense (107,553) (89,773) (47,472) (69,186)
Gain on sale of investments - 253,171 124,594 -
Other, net - 119,220 38,713 -
------------- ------------ ------------ ------------
(42,125) 303,472 205,947 (52,183)
------------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES,
CUMULATIVE EFFECT CHANGE AND
MINORITY INTEREST 2,488,229 (417,167) 366,469 583,341
PROVISION (BENEFIT) FOR INCOME TAXES
(Note 7) 1,159,000 (30,000) 201,000 300,000
--------- ------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
CHANGE AND MINORITY INTEREST 1,329,229 (387,167) 165,469 283,341
CUMULATIVE EFFECT FOR CHANGE IN
ACCOUNTING PRINCIPLE (Note 7) - 553,500 - -
------------- ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 1,329,229 166,333 165,469 283,341
MINORITY INTEREST IN INCOME (LOSS) (14,637) 53,916 57,147 (31,442)
------------- ------------ ------------ ------------
NET INCOME $ 1,343,866 $ 112,417 $ 108,322 $ 314,783
============= ============ ============ ============
INCOME (LOSS) PER COMMON SHARE (Note 9):
Income before cumulative effect of change in
accounting principle and minority interest $ 7,046.00 $ (2,217.58) $ 877.13 $ 1,501.94
Cumulative effect for change in accounting
principle - 3,170.28 - -
Minority interest in income (loss) 77.59 (308.81) (302.93) 166.67
------------- ------------ ------------ ------------
Net income $ 7,123.59 $ 643.89 $ 574.20 $ 1,668.61
============= ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND EQUIVALENTS OUTSTANDING
(Note 9) 188.65 174.59 188.65 188.65
====== ====== ====== ======
See accompanying notes to combined financial statements
F-3
JOURNEYCRAFT, INC. AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
Common Shares
-------------------------
Common, Common, Additional
No Par No Par Paid-in Unrealized Retained
Journeycraft Thermacom Stated At Capital Gain Earnings Total
------------ --------- --------- ---------- ---------- -------- -----
Balance, September 1, 1993 100.00 20 20,000 $ 125,000 $ - $ 832,463 $ 977,463
Issuance of options/rights for
services (Note 9) - - - 100,000 - - 100,000
Net income - - - - - 112,417 112,417
------- --- ---------- ---------- --------- ------------ ----------
Balance, August 31, 1994 100.00 20 20,000 225,000 - 944,880 1,189,880
Transfer of shares in subsidiary
to minority shareholder (Note 9) - - - 48,882 - - 48,882
Exercise of options/rights (Note 9) 58.65 - 225,000 (225,000) - - -
Unrealized holding gain on available
for sale securities - - - - 75,960 - 75,960
Net income - - - - - 1,343,866 1,343,866
------- --- ---------- ---------- --------- ------------ ----------
Balance, August 31, 1995 158.65 20 245,000 48,882 75,960 2,288,746 2,658,588
Exercise of options/rights
(unaudited) (Note 9) - 10 - - - - -
Unrealized holding loss on available
for sale securities (unaudited) - - - - (39,840) - (39,840)
Net earnings (unaudited) - - - - - 108,322 108,322
------- --- ---------- ---------- --------- ------------ ----------
Balance, February 29, 1996
(unaudited) 158.65 30 $ 245,000 $ 48,882 $ 36,120 $ 2,397,068 $ 2,727,070
======= === ========== ========== ========= ============ ===========
See accompanying notes to combined financial statements
F-4
JOURNEYCRAFT, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
Six Months Ended
Years Ended August 31, --------------------------
---------------------- February 29, February 28,
1995 1994 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,343,865 $ 112,417 $ 108,322 $ 314,783
----------- --------- ------------- -----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
(Gain) loss on sale of marketable securities - (253,171) (124,594) -
Contributed services - 100,000 - -
Depreciation and amortization 177,934 167,867 76,804 65,442
Deferred income tax (benefit) provision (22,000) (130,000) 86,000 (19,000)
Minority interest in income (loss) (14,637) 53,916 57,147 (31,442)
Cumulative affect of change in accounting principle - (553,500) - -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (258,699) 73,847 86,224 118,626
Prepaid expenses and other current assets (160,962) 466,297 (481) 11,098
Other assets (57,123) 711,857 (21,464) 8,724
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 639,823 681,617 28,058 670,750
Income taxes payable 880,894 80,531 (31,561) 376,555
Customer billings in excess of program costs 818,249 (901,038) (662,078) 243,703
Accrued lease liability (89,000) 98,000 (142,000) (26,000)
Other current liabilities (31,566) 66,014 (5,649) (46,453)
----------- --------- ------------- -----------
Total adjustments 1,882,913 662,237 (653,594) 1,372,003
----------- --------- ------------- -----------
Net cash provided by (used in) operating activities 3,226,778 774,654 (545,272) 1,686,786
----------- --------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in marketable securities (16,294) - (191,669) -
Proceeds from sale of marketable securities 5,985 746,875 166,594 -
Advances (repayments) from shareholders (24,469) (493,136) 50,000 -
Increase in notes receivable (155,000) - - -
Acquisition of property and equipment (132,650) (200,110) (97,636) (19,819)
----------- --------- ------------- -----------
Net cash provided by (used in) investing activities (322,428) 53,629 (72,711) (19,819)
----------- --------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable - 675,000 - -
Repayment of notes payable (675,000) (837,015) - (675,000)
----------- --------- ------------- -----------
Net cash provided by (used in) financing activities (675,000) (162,015) - (675,000)
----------- --------- ------------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,229,350 666,268 (617,983) 991,967
CASH AND CASH EQUIVALENTS, beginning of period 2,322,947 1,656,679 4,552,297 2,322,947
----------- --------- ------------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,552,297 $ 2,322,947 $ 3,934,314 $ 3,314,914
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 107,553 $ 89,773 $ 47,472 $ 69,186
=========== =========== =========== ===========
Income taxes paid $ 327,207 $ 19,684 $ 115,131 $ -
=========== =========== =========== ===========
See accompanying notes to combined financial statements
F-5
JOURNEYCRAFT, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
TWO YEARS ENDED AUGUST 31, 1995 AND SIX MONTHS ENDED
FEBRUARY 29, 1996 (UNAUDITED) AND FEBRUARY 28, 1995 (UNAUDITED)
1. Summary of Significant Accounting Policies:
a. Description of business
Journeycraft, Inc. and Affiliate (the "Company") provides
retail corporate travel related services, including reservations,
ticketing and travel management for major U.S. corporations. The Company also
organizes and operates meeting and group incentive programs for corporations
and medical professionals.
b. Principles of combination
The combined financial statements include the accounts of the
following:
Journeycraft, Inc. ("Journeycraft")
Journeycorp Travel Management Inc. ("Journeycorp") Wholly-owned subsidiary
X-Ceed Motivation, Inc. ("X-Ceed") Wholly-owned subsidiary
X-Ceed Motivation Atlanta, Inc. ("X-Ceed Atlanta") Majority-owned subsidiary
Theracom Communications, Inc. ("Theracom") Affiliate under common control
Upon combination, all significant intercompany accounts and
transactions are eliminated.
c. Revenue recognition
Revenue from retail travel services is recognized upon the ticketing
of the related flights. The Company bills clients in advance for group meeting
and incentive programs and records such deposits on the balance sheet, as
customer billings in excess of program costs. The Company recognizes revenue,
net of the related costs, when the travel and or program has commenced.
d. Investment in marketable securities
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." FASB No. 115 requires that investments in debt and equity
securities be designated as trading, held-to maturity, or available for sale.
Management considers the Company's marketable securities to be
available-for-sale and are reported at amounts which approximate fair value.
e. Depreciation and amortization
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the related assets or the remaining term of the lease, whichever
is shorter. Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale or
other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is included in
operations.
F-6
1. Summary of Significant Accounting Policies: (Cont'd)
f. Income taxes
In February 1992, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards Statement No. 109,
"Accounting for Income Taxes." FASB No. 109 requires a company to recognize
deferred tax assets and liabilities for the expected future income tax
consequences of events that have been recognized in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
temporary differences between the financial statements carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the temporary differences are expected to reverse. The Company adopted
FASB No. 109 in the year ended August 31, 1994. Under FASB No. 109, the Company
recorded a significant deferred tax asset that could not be recognized under
prior accounting rules.
g. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
h. Concentration of risk
The Company invests its excess cash in deposits and money market
accounts with major financial institutions and in commercial paper of companies
with strong credit ratings. Generally, the investments mature within ninety days
and therefore, are subject to little risk.
i. Statement of cash flows
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
j. Interim financial statements
The unaudited financial statements reflects all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair statement of the results for the period. The
results of operations are not necessarily indicative of the results expected for
the fiscal year.
2. Investment in Marketable Securities:
On September 1, 1994, the Company adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities".
At August 31, 1995, marketable equity securities, which are classified as
available for sale securities, are valued at the fair value of the securities
and the unrealized gain on the securities, net of income taxes, are reflected in
stockholders' equity. During the year ended August 31, 1995, unrealized gain
(net of income taxes of $61,950) on available for sale securities amounted to
$75,960.
F-7
2. Investment in Marketable Securities: (Cont'd)
Below is a summary of the unrealized gain net of income taxes from
available for sale securities:
Balance, September 1, 1994 $ -
Cumulative effect of change in accounting principle
to reflect marketable equity securities available
for sale at their fair value as of August 31, 1994 34,104
Unrealized gain in fair value of available for sale
securities for the year ended August 31, 1995 41,856
---------
Balance, August 31, 1995 $ 75,960
=========
3. Property and Equipment:
Property and equipment, at cost, consists of the following:
August 31,
--------------------- February 29,
1995 1994 1996
---- ---- ----
(Unaudited)
Machinery and equipment $ 495,788 $ 601,417 $ 549,903
Furniture and fixtures 279,033 246,489 300,138
Software 159,913 144,913 172,426
Leasehold improvements 311,625 295,167 321,528
------------- ------------- --------------
1,246,359 1,287,986 1,343,995
Less accumulated depreciation
and amortization 524,545 520,889 601,349
------------- ------------- --------------
$ 721,814 $ 767,097 $ 742,646
============= ============= =============
4. Due from Stockholder:
Due from stockholder represents a loan to the Company's majority
stockholder/officer. Principal is payable in five equal installments, with the
first installment due in March 1997. Commencing March 1, 1996, the loan bears
interest at 8%, prior to that date, the loan was non-interest bearing.
5. Note Receivable:
Note receivable consists of a note due from an officer of X-Ceed
Atlanta. The note bears interest at 3% and is due on October 12, 2000.
6. Other Assets:
Other assets at August 31, 1995 and 1994 include approximately $111,000
and $43,000, respectively, of cash surrender value of life insurance policies,
net of outstanding loans.
F-8
7. Income Taxes:
The provision (benefit) for income taxes is comprised of the following:
Years Ended Six Months Ended
August 31, -------------------------------
--------------------- February 29, February 28,
1995 1994 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Current:
Federal $ 749,000 $ 63,000 $ 73,000 $ 207,000
State 432,000 37,000 42,000 112,000
------------- ------------ ----------- -----------
1,181,000 100,000 115,000 319,000
------------- ------------ ----------- -----------
Deferred:
Federal (14,000) (82,000) 54,000 (12,000)
State (8,000) (48,000) 32,000 (7,000)
------------- ------------ ----------- -----------
(22,000) (130,000) 86,000 (19,000)
------------- ------------ ----------- -----------
$ 1,159,000 $ (30,000) $ 201,000 $ 300,000
============= ============ =========== ===========
The Company has capital loss carryovers of approximately $390,000 which
can be used to reduce future taxable capital gains through 2000. Under Section
383 of the Internal Revenue Code of 1986, should there occur a greater than 50%
"ownership change" of a company, the ability of the Company to utilize the
available loss carryforwards would be restricted to a prescribed annual amount.
The July 1996 merger (see Note 11) meets the criteria of Section 382.
Accordingly, future utilization of the loss carryforwards will be subject to
limitation.
The net deferred tax amounts included in the financial statements consist
of the following:
August 31,
--------------------- February 29,
1995 1994 1996
---- ---- ----
(Unaudited)
Deferred tax assets:
Capital loss carryovers $ 176,000 $ 176,000 $ 119,000
Amortization 56,000 60,000 50,000
Impairment of investment 169,000 169,000 169,000
Non-cash compensation 137,000 75,000 158,000
Accrued lease obligation 414,000 454,000 351,000
Other 52,000 41,000 52,000
------------- ------------ ------------
1,004,000 975,000 899,000
Deferred tax liabilities:
Unrealized gain on
marketable securities (62,000) - (28,000)
Valuation allowance for
deferred tax assets (299,000) (292,000) (273,000)
------------- ------------ ------------
Net deferred income taxes $ 643,000 $ 683,000 $ 598,000
============= ============ ============
F-9
7. Income Taxes: (Cont'd)
The Company's effective tax rate for the years ended 1995 and 1994 on
earnings differs from the Federal Statutory regular tax rate as follows:
Years Ended
August 31,
---------------------
1995 1994
---- ----
Federal tax expense at
statutory rate 34.0% (34.0)%
State income tax expense 11.2 (1.7)
Other 1.1 18.1
Deferred taxes:
Valuation allowance .3 10.4
---- ----
46.6% (7.2)%
==== ====
The Company adopted FASB No. 109 in the year ended August 31, 1994.
Recognition of the deferred tax asset provided a cumulative effect increase to
income of $553,500.
8. Commitments:
a. Lease commitment
The Company conducts its operations from leased space in various
locations throughout the United States. These leases (classified as operating
leases) expire at various dates through June 2008. Management expects that in
the normal course of business these leases will be renewed or replaced by other
leases.
As of August 31, 1995, future net minimum rental payments (net of
sublease income) under operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows:
Years Ending
August 31,
1996 $ 761,000
1997 603,000
1998 580,000
1999 567,000
2000 565,000
Thereafter 4,636,000
-------------
$ 7,712,000
=============
Rental expense approximated $865,000 and $933,000 for the years
ended August 31, 1995 and 1994, respectively, and $452,000 and $435,000 for
the six months ended February 29, 1996 and February 28, 1995, respectively.
The Company recognizes rent expense on its leases on a straight-line
basis. The excess of rent expense on a straight-line basis over the rental
payments made, is recorded as an accrued liability.
F-10
8. Commitments: (Cont'd)
b. Retirement plan
The Company maintains a retirement plan which is a salary reduction
plan under Section 401(k) of the Internal Revenue Code. Participation in the
plan is voluntary, and any participant may elect to contribute up to 15% of
their earnings The Company will match 10% of the first 6% of the employee's
contribution. Company contributions approximated $7,000 and $11,000 for the
years ended August 31, 1995 and 1994, respectively, and $8,000 and $4,000 for
the six months ended February 29, 1996 and February 28, 1995, respectively.
9. Stockholders' Equity:
a. Capitalization
The authorized capital of both Journeycraft and Theracom consist of
200 shares of common stock with no par value.
b. Stock options/rights
In October 1993, Theracom granted a consultant an option to
acquire 10 shares of Theracom common stock at an exercise price of $.10 per
share. This option was exercised in January 1996.
In March 1994, the Company granted a consultant a right to acquire
26.65 shares of common stock for consulting services provided. The value of this
right ($100,000) was charged to operations in the year ended August 31, 1994.
The consultant exercised the right in April 1995.
In April 1995, the Company issued 32 shares of common stock in
connection with the exercise of an option issued in prior years as
consideration for consulting services.
c. Stock bonus
An employment agreement with an officer/shareholder of X-Ceed Atlanta
provided for the issuance of up to 25 shares (25%) of X-Ceed Atlanta common
stock if certain earnings levels were attained. The officer/shareholder earned 9
and 16 shares in the twelve month periods ended March 31, 1996 and 1995,
respectively. The subsidiary recorded compensation expense related to this stock
bonus of $138,000 and $67,000 for the years ended August 31, 1995 and 1994,
respectively, and $45,000 and $80,000 for the six months ended February 29, 1996
and February 28, 1995, respectively.
The additional shares earned by the officer/shareholder were
transferred/will be transferred from Journeycraft's stockholdings. The excess of
the fair value of the shares transferred over their book value has/will be
recorded as equity adjustment.
d. Income (loss) per share
Income (loss) per share were computed by dividing income (loss) by
the weighted average number of shares of common stock outstanding during each
period presented. The weighted average number of shares was computed as follows:
F-11
9. Stockholders' Equity: (Cont'd)
d. Income (loss) per share (Cont'd)
Years Ended Six Months Ended
August 31, -----------------------------
------------------ February 29, February 28,
1995 1994 1996 1995
---- ---- ---- ----
Journeycraft:
Weighted shares outstanding 122.00 100.00 158.65 100.00
Common stock equivalents 36.65 44.59 - 58.65
Theracom:
Weighted shares outstanding 20.00 20.00 22.50 20.00
Common stock equivalents 10.00 10.00 7.50 10.00
----- ----- ---- -----
188.65 174.59 188.65 188.65
====== ====== ====== ======
10. Loss on Investment Impairment:
Loss on investment impairment for the year ended August 31, 1994
represents travel and incentive business joint ventures that were abandoned.
11. Subsequent Event:
On July 2, 1996, the Company was acquired by Water-Jel Technologies, Inc.
("Water-Jel"), and approximately 3,500,000 shares of Water Jel's common stock
were issued in exchange for all of the outstanding shares of the Company and its
affiliate. The merger will be accounted for as a pooling of interests.
F-12
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
UNAUDITED PROFORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements give effect to the Merger of Water-Jel Technologies, Inc. ("WJT") and
JourneyCraft, Inc. and Affiliate ("JC") under the "pooling of interests" method
of accounting. These pro forma financial statements are presented for
illustrative purposes only, and therefore are not necessarily indicative of the
operating results and financial position that might have been achieved had the
Merger occurred as of an earlier date, nor are they necessarily indicative of
operating results and financial position which may occur in the future.
A pro forma condensed combined balance sheet is provided as of February
29, 1996, giving effect to the Merger as though it had been consummated on that
date. The pro forma condensed combined balance sheet combines the balance sheets
of WJT and JC as of February 29, 1996. The pro forma condensed combined
statements of income are provided combining WJT and JC for the six month periods
ended February 29, 1996 and February 28, 1995, and the years ended August 31,
1995 and 1994, giving effect to the Merger as though it had occurred at the
beginning of the earliest period presented.
The historical condensed statements of income for annual periods
presented are derived from the separate historical financial statements of WJT
and combined financial statements of JC, and should be read in conjunction with
the companies' separate financial statements. The historical financial
statements as of or for the six months ended February 29, 1996 and February 28,
1995 are derived from the historical interim financial statements of WJT and
combined interim financial statements of JC, and have been prepared in
accordance with generally accepted accounting principles applicable to interim
financial information and, in the opinion of WJT's and JC's respective
managements, include all adjustments necessary for a fair presentation of
financial information for such interim periods.
F-13
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
PRO FORMA CONDENSED COMBINED BALANCE SHEET
FEBRUARY 29, 1996
(Unaudited)
Historical Pro Forma
--------------------------------------- -----------------------------
Water-Jel
Technologies Journeycraft
Inc. Inc. Adjustments Combined
---------------- ---------------- ---------------- ----------------
Assets
-------
Current assets:
Cash and cash equivalents $ 3,319,029 $ 3,934,314 $ - $ 7,253,343
Accounts receivable, net 522,840 1,087,805 - 1,610,645
Inventories 1,135,030 - - 1,135,030
Prepaid expenses and other current assets 702,288 161,443 - 863,731
Deferred income taxes 136,000 - - 136,000
----------- ----------- -------- ------------
Total current assets 5,815,187 5,183,562 - 10,998,749
Property and equipment, net 957,120 742,646 - 1,699,766
Intangible assets, net 125,568 - - 125,568
Investment in marketable securities, at
fair value 947,494 370,520 - 1,318,014
Deferred income taxes 225,983 597,870 - 823,853
Due from stockholder - 1,247,483 - 1,247,483
Note receivable - 155,000 - 155,000
Other assets 231,320 190,105 - 421,425
----------- ----------- -------- ------------
$ 8,302,672 $ 8,487,186 $ - $ 16,789,858
=========== =========== ======== ============
F-14
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
PRO FORMA CONDENSED COMBINED BALANCE SHEET
FEBRUARY 29, 1996
(Unaudited)
Historical Pro Forma
------------------------------- ------------------------------
Water-Jel
Technologies Journeycraft
Inc. Inc. Adjustments Combined
---------- ---------- ------------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued expenses $ 331,529 $1,687,743 $ - $ 2,019,272
Income taxes payable-current - 1,026,837 - 1,026,837
Customer billings in excess of program costs - 2,002,353 - 2,002,353
Other current liabilities 39,200 28,799 - 67,999
---------- ---------- ------------- ------------
Total current liabilities 370,729 4,745,732 - 5,116,461
---------- ---------- ------------- ------------
Long-term debt 110,300 778,000 - 888,300
---------- ---------- ------------- ------------
Interest of minority stockholder - 236,384 - 236,384
---------- ---------- ------------- ------------
Stockholders' equity:
Common stock, no par value, 200 shares
authorized, issued and outstanding 158.65 - 244,000 (244,000)2(i) -
Common stock, no par value, 200 shares
authorized, issuedandoutstanding 30 - 1,000 (1,000)2(i) -
Common stock, $.08 par value; authorized
12, 500,000 shares; 3,499,180 and
6,999,180 issued and outstanding, respectively 279,934 - 280,000 2(i) 559,934
Preferred stock, $.08 par value, authorized
125,000 shares; -0- issued
and outstanding - - - -
Additional paid-in capital 9,633,335 48,882 (48,882)2(ii)
13,882 2(ii) 9,647,217
Unrealized gain on investments reported
at fair value 324,628 36,120 360,748
Retained earnings (deficit) (2,416,254) 2,397,068 - (19,186)
---------- ---------- ------------- ------------
Total stockholders' equity 7,821,643 2,727,070 - 10,548,713
---------- ---------- ------------- ------------
$8,302,672 $8,487,186 $ - $16,789,858
========== ========== ============= ===========
See accompanying notes to pro forma condensed combined financial statements
F-15
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996
(Unaudited)
HISTORICAL PRO FORMA
----------------------------- --------------------------
WATER-JEL JOURNEYCRAFT
TECHNOLOGIES INC.
INC. AND AFFILLIATE ADJUSTMENTS COMBINED
------------- -------------- ----------- -----------
Revenues $1,930,367 $24,298,099 $ - $26,228,466
Operating expenses 1,917,566 24,137,577 - 26,055,143
---------- ----------- --- -----------
Operating income 12,801 160,522 - 173,323
Other income 346,716 205,947 552,663
---------- ----------- --- -----------
Income before provision for income
taxes and minority interest 359,517 366,469 725,986
Provision for income taxes 70,000 201,000 271,000
---------- ----------- --- -----------
Income before minority interest 289,517 165,469 - 454,986
Minority interest in earnings - 57,147 - 57,147
---------- ----------- --- -----------
Net Income $ 289,517 $ 108,322 $ - $ 397,839
---------- ----------- --- -----------
---------- ----------- --- -----------
Income per common share
Primary $ 0.08 $ 574.20 $ 0.06
---------- ----------- -----------
---------- ----------- -----------
Assuming full dilution $ 0.08 $ 574.20 $ 0.06
---------- ----------- -----------
---------- ----------- -----------
Weighted average number of shares
outstanding
Primary 3,547,716 188.65 7,047,716
---------- ----------- -----------
---------- ----------- -----------
Assuming full dilution 3,623,005 188.65 7,123,005
---------- ----------- -----------
---------- ----------- -----------
See accompanying notes to pro forma condensed combined financial statements
F-16
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1995
(Unaudited)
Historical Pro Forma
------------------------------ ---------------------------
Water-Jel Journeycraft
Technologies Inc.
Inc. and Affiliate Adjustments Combined
------------ ------------- ----------- ------------
Revenues $ 2,377,445 $ 16,174,135 $ -- $ 18,551,580
Operating expenses 2,242,780 15,538,611 -- 17,781,391
----------- ------------ ---------- ------------
Operating income 134,665 635,524 -- 770,189
Other income (expense) 65,877 (52,183) -- 13,694
----------- ------------ ---------- ------------
Income before provision for income taxes and
Minority interest 200,542 583,341 -- 783,883
Provision for income taxes - 300,000 -- 300,000
----------- ------------ ---------- ------------
Income before Minority interest 200,542 283,341 -- 483,883
Minority interest in (loss) - (31,442) -- (31,442)
----------- ------------ ---------- ------------
Net Income $ 200,542 $ 314,783 $ -- $ 515,325
=========== ============ ========== ============
Income per common share
Primary $ 0.06 $ 1,668 61 $ 0.07
=========== ============ ============
Assuming full dilution $ 0.06 $ 1,668 61 $ 0.07
=========== ============ ============
Weighted average number of shares outstanding
Primary 3,499,199 188.65 6,999,199
=========== ============ ============
Assuming full dilution 3,499,199 188.65 6,999,199
=========== ============ ============
See accompanying notes to pro forma condensed combined financial statements
F-17
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED AUGUST 31, 1995
Historical Pro Forma
------------------------------------ ----------------------------
Water-Jel Journeycraft
Technologies Inc.
Inc. and Affiliate Adjustments Combined
------------- ------------- ----------- ------------
Revenues $ 5,029,217 $ 38,486,223 $ - $ 43,515,440
Operating expenses 4,864,312 35,955,869 - 40,820,181
----------- ------------- ----------- ------------
Operating income 164,905 2,530,354 - 2,695,259
Other income (expense) 150,596 (42,125) - 108,471
----------- ------------- ----------- ------------
Income before provision (benefit) for income
taxes and minority interest 315,501 2,488,229 - 2,803,730
Provision (benefit) for income taxes (471,875) 1,159,000 - 687,125
----------- ------------- ----------- ------------
Income before minority interest 787,376 1,329,229 - 2,116,605
Minority interest in (loss) - (14,637) - (14,637)
----------- ------------- ----------- ------------
Net Income $ 787,376 $ 1,343,866 $ - $ 2,131,242
=========== ============= =========== ============
Income per common share
Primary $ 0.22 $ 7,123.59 $ 0.30
=========== ============= ============
Assuming full dilution $ 0.22 $ 7,123.59 $ 0.30
=========== ============= ============
Weighted average number of shares outstanding
Primary 3,547,716 188.65 7,047,716
=========== ============= ============
Assuming full dilution 3,623,005 188.65 7,123,005
=========== ============= ============
See accompanying notes to pro forma condensed combined financial statements
F-18
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED AUGUST 31, 1995
Historical Pro Forma
----------------------------- -------------------------
Water-Jel Journeycraft
Technologies Inc.
Inc. and Affiliate Adjustments Combined
----------- ------------- ----------- --------------
Revenues $ 4,887,591 $ 36,445,285 $ - $ 41,332,876
Operating expenses 4,468,899 37,165,925 - 41,634,824
----------- ------------ ------ ------------
Operating income (loss) 418,692 (720,640) - (301,948)
Other income 707,155 303,472 - 1,010,627
----------- ------------ ------ ------------
Income (loss) before provision for
income taxes minority interest 1,125,847 (417,168) - 708,679
Benefit for income taxes (115,000) (30,000) - (145,000)
----------- ------------ ------ ------------
Income (loss) before minority interest 1,240,847 (387,168) - 853,679
Minority interest in earnings (loss) - 53,916 - 53,916
----------- ------------ ------ ------------
Income before cumulative effect for change
accounting principle $ 1,240,847 $ (441,084) $ - $ 799,763
=========== ============ ====== ============
Income per common share
Primary $ 0.35 $ (2,526.40) $ 0.11
=========== ============ ============
Assuming full dilution $ 0.35 $ (2,526.40) $ 0.11
=========== ============ ============
Weighted average number of shares outstanding
Primary 3,498,857 174.59 6,998,857
=========== ============ ============
Assuming full dilution 3,498,857 174.59 6,998,857
=========== ============ ============
See accompanying notes to pro forma condensed combined financial statements
F-19
WATER-JEL TECHNOLOGIES, INC.
AND
JOURNEYCRAFT, INC. AND AFFILIATE
NOTES TO UNAUDITED PROFORMA
COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only, giving effect to the Merger of
Water-Jel Technologies, Inc. ("WJT") and JourneyCraft, Inc. and Affiliate ("JC")
as accounted for by the "pooling of interests" method. In accordance with the
Commission reporting rules, the pro forma combined statements of income, and the
historical statements from which they are derived, present only income from
continuing operations and, therefore do not include discontinued operations,
extraordinary items, and the cumulative effects of accounting changes.
2. Pro Forma Adjustments:
Stockholders' equity
Stockholders' equity as of February 29, 1996 has been adjusted to
reflect the following:
(i) Common Stock, $.08 par value, has been adjusted to reflect the
assumed issuance of approximately 3,500,000 shares of Water-Jel Technologies,
Inc. Common Stock, $.08 per value, in exchange for 158.65 and 30 shares of
JourneyCraft, Inc. and Theracom, Inc. (Affiliate), respectively, Common Stock
issued and outstanding as of February 29, 1996, utilizing the exchange rate of
18,552.8757 shares of WJT for each share of JC.
(ii) Additional paid-in capital of JC is adjusted for the effects of
the aforementioned issuance of approximately 3,500,000 shares of WJT Common
Stock having a par value of $.08 per share in exchange for JC Common Stock.
Pro Forma Condensed Combined Statements of Income
a. Earnings per common share
Pro Forma weighted average number of common shares outstanding for
the six month periods ended February 29, 1996 and February 28, 1995 are based
upon WJT's and JC's combined historical weighted average shares, after
adjustment of JC's historical number of shares by the Conversion Number.
F-20
b. The pro forma condensed combined statements of income do not give
effect to transaction costs of the Merger and nonrecurring costs expected to be
incurred in connection with the integration of the companies' business and
operations. These costs will be charged to operations.
F-21