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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996).
For the fiscal year ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from __________ to __________
Commission file number 1-12856S
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SALEX HOLDING CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 42-1358036
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
50 Laser Court, P.O. Box 18029 Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 436-5000
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Securities registered under Section 12 (b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, par value $.01 OTC Bulletin Board
Warrants to Purchase Common Stock OTC Bulletin Board
Securities registered pursuant to Section 12(g) of the Act:
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(Title of Class)
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(Title of Class)
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant (1) has 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. Yes [ ] No [X]
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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates as of
December 4, 1998, (based upon the average of the closing bid and asked prices of
the Common Stock as quoted on the OTC Bulletin Board on December 4, 1998) was
approximately $221,081. For purposes of this computation the shares of Common
Stock held by directors, executive shareholders owning more than 5% of the
Company's outstanding Common Stock were deemed to be stock held by affiliates.
As of December 4, 1998, there were 4,709,424 shares of Common Stock outstanding
held by non-affiliates.
As of December 4, 1998, 13,004,770 shares of the Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
Item 1. Business
All statements contained herein that are not historical facts including,
but not limited to, statements regarding the future development plans of Salex
Holding Corporation (the "Company" or the Registrant) and the Company's ability
to generate cash from its operations, are based upon current expectations. These
statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward looking statements are the
following: competition in the automobile asset management business, the
inability of the Company to obtain additional financing and general business and
economic conditions.
Recent Events
Sale of Registrant's Executive Offices
On December 23, 1998, the Registrant entered into a real estate purchase
agreement ("Purchase Agreement") by and among the Registrant, Salvatore Crimi
and Sun Associates, LLC ("Sun Associates"), a limited liability company
controlled by Betty Sun, (as record title holder) who is the wife of Pershing
Sun, a director of the Registrant. Pursuant to the terms of the Purchase
Agreement, the Registrant and Salvatore Crimi agreed to sell to Sun Associates
certain property located in Hauppauge New York which is improved with the
Registrant's executive offices containing approximately 12,000 square feet of
space and a surface parking lot (the "Property"). The purchase price for the
Property was $1,100,000. Mr. Crimi was not personally entitled to any portion
of the proceeds for the sale of the Property and was only involved in the
transaction to the extent that certain title issues required his involvement.
Of the proceeds received by the Registrant $782,325.74 was used to pay the
mortgage securing the Property. The balance of the proceeds was used for
working capital by the Registrant. Simultaneously with the sale of the
Property, the Registrant and Sun Associates entered into a lease agreement (the
"Lease Agreement") pursuant to which Sun Associates leased the Property to the
Registrant. Under the lease agreement, the annual basic rent for the Property
during the period commencing December 31, 1998 and ending on December 31, 1999
is $168,000. Such annual basic rent increases, by an amount not greater than
$8,985 during each year of the term of the Lease Agreement. As part of the
Lease Agreement, the Registrant and Sun Associates entered into a repurchase
option agreement (the "Option Agreement") which provides that the Registrant
may repurchase the property at any time prior to June 23, 1999 at a purchase
price of $1,155,000, net of Sun Associates' transaction costs, provided that
the Registrant is not in default under the Lease Agreement. The Lease Agreement
further provides that if Sun Associates sells the Property prior to the
December 31, 1999 then 50% of the profits resulting from the sale will be paid
to the Registrant provided that the Registrant is not in default under the
Lease Agreement.
Description of the Company
Corporate Fleet Program
The Company is in the business of automobile asset management and through
such business manages, on a nationwide basis, the maintenance and repair of
fleets of automobiles and small trucks which are owned and operated by
corporate customers (the "Corporate Fleet Program"). If a vehicle of one of the
Company's corporate customers needs repair, the Company directs the customers
to the most conveniently located service center that is part of its nationwide
servicing network (the "Service Network"). All of the service centers that are
part of the Service Network are independently owned or affiliated with a
national chain of repair centers, have been pre-screened and pre-approved by
the Company and are reviewed by the Company from time to time. Before any work
is commenced by the service center on a vehicle referred to it by the Company,
the service center must contact the Company's certified mechanics and other
auto specialists, who are located at its Hauppauge offices, to discuss all the
proposed necessary repairs and the proposed cost thereof. The Company's
specialists negotiate with the service centers to ensure that the customer is
not overcharged or subjected to unnecessary repairs. The Company monitors the
repairs, if needed, to assure on time completion of the work, expedites the
delivery
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of needed parts when necessary and, in certain locations, provides the customer
with access to a discount rental car until the repairs are completed.
Participation in the Corporate Fleet Program provides the corporate customers
with quality and price control over all work performed and provides the service
centers with reliable levels of volume. In exchange for its services, the
Company receives a monthly management fee, per-occurrence or monthly management
fee based on the number of vehicles in the fleet, from the corporate customer
based on the number of vehicles registered in the program and a fee from the
Service Network of a percentage of the cost of repair and maintenance
(including both parts and labor) depending upon the type of service
rendered.
The Service Network
The Company services all of its customers through its nationwide network
of pre-screened, pre-approved maintenance and repair centers. Over 30,000
franchised and independently owned service centers are affiliated with the
Service Network. The service centers are located in all 50 states, Canada and
Puerto Rico. The Service Network includes service centers associated with
national chains of auto repair centers, such as The Goodyear Tire and Rubber
Company and Jiffy Lube, as well as smaller local centers. The Company retains
complete control over which repair centers are affiliated with the Service
Network. Generally, the Company's written affiliation agreements with the
service centers are terminable at will with short notice requirements, and thus
any service center that fails to perform to the Company's standards will be
terminated. The Company has developed and maintains proprietary software and
telecommunications at its corporate headquarters in Hauppauge, New York. The
database allows the Company to (i) keep track of the labor rates, areas of
specialty and hours of operation of each service center which helps the Company
direct customers to appropriate service centers and (ii) communicate with the
service centers, enabling the Company to oversee and monitor the maintenance
and repair work performed by the centers. For the period ended April 30, 1998,
net revenues from the Company's operation of its Corporate Fleet Program were
$22,530,587.
Guaranties
Most of the repair and maintenance services provided to the corporate
fleets are guaranteed against defects in parts and workmanship for certain
periods of time and/or for a certain number of miles. As part of their
affiliation agreements with the Company, the individual service centers are
required to make such a guaranty to the Company. The Company, in turn, grants
an identical guaranty to its corporate customers. If a vehicle has been
improperly repaired, the customer contacts the Company and the Company arranges
to have the appropriate repairs done at no additional cost to the customer
either through the service center that originally performed the work, or
through a service center responsible for the costs of rectifying any improper
or faulty repairs. The Company coordinates the reimbursement of costs between
service centers. In rare cases, an improper repair is not covered by the
Service Network's member and the Company must pay for the repairs to the
vehicle from its own funds. Historically, claims which are not covered by a
Service Network member have been insignificant. If the vehicle is under a
manufacturer's warranty, the Company arranges for the repairs to be done by an
authorized dealer. The Company incurs no costs for work performed by an
authorized dealer that is covered by a manufacturer's warranty.
Other Services Provided by the Company
In addition to the services provided under the Corporate Fleet Program,
the Company also provides its customers with other services relating to
automobile repair, repossession and disposal.
Computerized Auction System and the Collateral Disposal Services
The Company maintains a proprietary computer network of buyers nationwide
who submit bids on vehicles which according to the Company's vehicle condition
reports, are considered demolished or clients do not wish to repair. The
Company receives a fee from the corporate fleet or financial institution
customer who wishes to dispose of the demolished vehicle, in addition to a fee
from the buyer upon its purchase of the demolished
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vehicle. The Company believes that these fees are generally lower than
traditional auction and disposal service fees. The Company has focused on
selling its customers' salvaged and demolished vehicles. In addition, the
Company has begun to use its disposal services to sell non-salvage vehicles to
auto wholesalers and retailers.
The Collateral Disposal Service is a vehicle disposal service that the
Company provides to loan servicing companies and lenders that assists these
entities in the repossession, storage and auctioning off of repossessed
automobiles. The Company provides the proper control, documentation and
conversion of vehicle collateral into cash. Under the program, loan servicing
companies and lenders receive significant discounts on storage, access to the
Computerized Auction System and access to the Company's nationwide vehicle
transport system. These services enable loan servicing companies and lenders to
convert repossessed vehicles more quickly into cash and receive a higher price
for each vehicle than they are presently able to receive in the marketplace
from traditional services and auction companies.
Insurance Subrogation
If one of the Company's customers has a vehicle that has been in an
accident, the Company offers to the customer its expertise and experience in
the area of insurance subrogation (i.e. making a determination of fault and the
payment of damages and claims based upon that determination). Insurance
subrogation is a process that has numerous regulations and reporting
requirements that vary from state to state. Corporate fleet operators and
financial institutions rarely have the expertise or desire to perform this
function. The Company has the ability to perform these services and it earns a
percentage of the amount collected from third parties or their insurance
companies. The Company generally retains a percentage of amounts collected,
plus expenses, as a fee for its subrogation services.
Retail Customer Autocare Plan
Through its retail customer autocare plan the Company extends its current
services to individual automobile owners. The services provided to the customer
and the economic benefits to the Company are essentially the same as those that
are provided to its corporate customers under the Corporate Fleet Program. In
addition to the fees that the Company receives from the service centers, the
Company also charges its retail customers an annual membership fee to enter the
network, depending upon the service option level that the customer chooses.
Unlike roadside service clubs which only arrange for towing service in the
event of a breakdown or collision, the Company actually monitors and negotiates
all repairs with the repair centers in the Service Network. The Company
believes that its retail customers are able to receive collision, maintenance
and repair services anywhere in the country for less than they would pay if
they were not members of the Company's Program.
Extended Service Contracts
In April 1996, the Company entered into an agreement with Virginia Surety,
an insurance company specializing in the issuance of extended mechanical
service contract agreements for automobiles and light trucks nationwide. Under
the Agreement, the Company offers to corporate customers, financial
institutions and retail customers service contracts covering mechanical repairs
for the covered vehicle for twelve to twenty-four months. In addition to the
up-front fees earned on the sale of the contracts, the Company generates
revenues from the management of related repairs coordinated through the Service
Network.
Corporate Customer Base
The Company's customers include corporations that have automobile fleets,
insurance companies, financial institutions and individuals that want to take
advantage of fleet pricing for automotive repair and vehicle disposal. The
typical customer for our product is a company, which provides automobiles and
or trucks to employees in the ordinary course of business. For the fiscal year
ended April 30, 1998, only one customer accounted for more than 10% of the
Company's revenues.
Competition
The Company believes the principal competitive factors in its corporate
fleet business are prices and service. Key factors that have resulted in the
present competitive position in this industry are use of technology and
I-3
bundling of services. This is especially present for those companies that use
the funding of leases and whose primary function is to sell money to finance a
corporate fleet. Collision and mechanical maintenance is more a sideline for
these lenders and not the primary product. Companies such as PH&H Corp. and GE
Capital bundle the cost of these services into the lending rate.
Management Information Systems
The Salex Response System is software developed by the Company which
offers a full range of interactive functions for the analysis of trends;
comparison to industry of fleet standards; and identification of opportunities
for future improvement. It presents various modifiable systems, which can be
tailored to meet the exact current and future requirements of the individual
fleet. Salex Response is available and operational on Windows 3.X, 95 and NT.
Main Fleet Management Menu -- The Main Fleet Management menu allows the
fleet administrator to design and print standard and customized reports and to
display interactive graphics.
Vehicle Operations Menu -- The Vehicle Operations Menu tracks, in detail,
the vehicle from order status through delivery for new acquisition and provides
a comprehensive fleet cycling and disposal capability. In addition, it monitors
all of the operational aspects of fleet management, including analysis of
operating, fixed and maintenance costs.
Driver Administration Menu -- The Driver Administration Menu provides the
Company control over vehicle assignment and usage by individual drivers. It
tracks historical assignment of drivers to vehicles by date and mileage, and
vehicle assignment by driver. Personal mileage and Fair Market Value can be
detailed for personal tax liabilities.
Safety Administration Menu -- The Safety Administration Menu audits any
accidents that the vehicle or driver may have been involved in, and the
resulting salvage or subrogation that may be realized. It also monitors any
formal training programs that the driver is enrolled in or has completed; and a
history of parking violations and DMV reporting.
Accident Menu -- The Accident Menu details every accident that involves a
company vehicle. It describes not only which vehicle was involved in the
accident, but also who was driving at the time. It details the third party
vehicle(s), who was at fault, what citations were issued, any injuries that
were sustained and their extent, and all witnesses. Finally, it monitors the
process of subrogation or salvage and the cost of recovery process. Through
exception reporting and live interactive graphics, the system will allow our
customers to bench mark and project trends, and to provide senior management
with unlimited specialized analysis.
Marketing and Advertising
Sales of the Company's vehicle management services are made by the
Company's sales staff, which consists of six full-time salespeople and
Salvatore Crimi, the Company's Chief Executive Officer and founder. Marketing
is presently conducted through direct solicitation, which enables the Company
to deal directly with, and be readily accessible to its major customers. New
marketing and advertising strategies and the addition of new personnel will be
necessary to accommodate the Company's anticipated expansion plans. The Company
also markets its services through labor organizations, credit card companies,
insurance companies, universities, credit unions and other associations.
Federal Regulation
The Federal Trade Commission, under the Magnuson-Moss Warranty Act, and
various state and local laws regulate the requirements and mechanics of
consumer product warranties. Since the Company provides products and services
to consumers and guarantees work performed by the service centers, it is
subject to these regulations in addition to other laws regarding consumer
products. The Company believes that it is in compliance with all such laws and
regulations.
I-4
The promulgation of any additional laws or regulations regarding
warranties or consumer products could have an adverse effect on the Company's
business. There can be no assurance that the Company will have the ability to
comply with any such laws or regulations. The failure to comply with such
statutes and regulations could have a material adverse effect upon the Company.
Employees
As of December 16, 1998, the Company employed 66 full and part-time
employees. Of the 66 employees, 7 are classified as executives, 13 as sales and
administrative personnel, 37 as customer service personnel and 9 as clerical
personnel. None of the Company's employees are represented by collective
bargaining agreements. The Company believes that its relations with its
employees are good and has not experienced any interruption of its operations
due to labor disagreements.
Item 2. Properties
The Company leases its executive office which is comprised of
approximately 12,000 square feet and is located at 50 Laser Court, Hauppauge,
New York 11788. See: "Recent Events -- Sale of Executive Offices" and "Certain
Transactions."
Item 3. Legal Proceedings
There are no material legal proceedings now pending or threatened against
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the shareholders of the Company during
the fourth quarter of the fiscal year ended April 30, 1998.
I-5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There does not exist any established trading market for the Common Stock.
The Common Stock is presently being quoted on the OTC Bulletin Board. On April
16, 1997, the Company's Common Stock, which was trading on the NASDAQ Small-Cap
Market, under the trading symbol "SYNH" was delisted. On January 17, 1997, the
Company's Common Stock, which was trading on the Boston Stock Exchange under
the trading symbol "SNH" was delisted. No dividends were paid during fiscal
years ended April 30, 1998 and 1997.
For the fiscal year ended April 30, 1998, the table entitled "Year Ended
April 30, 1998, sets forth the high and low bid information for the Common
Stock (based on transaction data as reported by the OTC Bulletin Board). For
the fiscal year ended April 30, 1997, the table entitled "Year Ended April 30,
1997" sets forth the high and low closing sale prices for the Common Stock
(based on transaction data as reported by the NASDAQ Small Cap Market).
Stock Price(s)
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High Low
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YEAR ENDED April 30, 1998:
07/31/97 ................. First Quarter:
Common Stock 0.375 0.15625
10/31/97 ................. Second Quarter:
Common Stock 0.1875 0.125
01/31/98 ................. Third Quarter:
Common Stock 0.15625 0.125
04/30/98 ................. Fourth Quarter:
Common Stock 0.21875 0.125
YEAR ENDED April 30, 1997:
07/31/96 ................. First Quarter:
Common Stock 3.625 2.50
10/31/96 ................. Second Quarter:
Common Stock 4.125 2.75
01/31/97 ................. Third Quarter:
Common Stock 1.875 1.00
04/30/97 ................. Fourth Quarter:(1)
Common Stock 0.625 0.375
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(1) On April 16, 1997, the Company's Common Stock was delisted by the NASDAQ
Small Cap Market. From April 16, 1997, through April 30, 1997, the
Company's Common Stock was quoted on the OTC Bulletin Board. During such
period the average closing bid and ask prices were .241 and .463
respectively.
HOLDERS
The number of holders of record of the Company Common Stock as of December
4, 1998, was 124.
DIVIDENDS
No dividends were paid during the fiscal year ended April 30, 1998. Based
on the Company's current financial situation, the Company is unable to pay
dividends to its shareholders.
II-1
Item 6. Selected Financial Data (In thousands, except per share amounts)
YEAR ENDED APRIL 30,
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1998 1997 1996 1995 1994
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STATEMENT OF OPERATIONS DATA:
Net Sales ............................................ 23,273 22,959 25,482 33,884 29,235
Cost of Sales ........................................ 18,866 18,643 21,174 28,392 24,298
Gross profit ......................................... 4,407 4,316 4,308 5,492 4,937
Selling, general & administrative expenses ........... 4,510 5,022 6,188 5,123 4,454
Non-cash imputed compensation ........................ 400 -- -- -- --
Operating income (loss) .............................. (503) (706) (1,880) 369 483
Interest expense and other -- net .................... 239 380 460 432 282
Net income (loss) .................................... (744) (1,087) (2,399) (94) 120
Accretion of preferred stock ......................... -- (1,062) -- -- --
Net loss attributable to Common Stockholders ......... (744) (2,149) (2,399) (94) 120
Net income (loss) per common share ................... (0.06) (0.19) (0.21) (0.01) (0.01)
April 30,
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1998 1997 1996 1995 1994
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BALANCE SHEET DATA:
Accounts receivable .................................. 3,348 3,452 3,219 3,288 4,881
Total assets ......................................... 6,354 6,847 7,821 8,208 9,601
Long-term debt ....................................... 556 781 1,054 1,278 1,329
Stockholders' equity (deficit) ....................... (1,847) (1,528) 821 1,201 1,359
Item 7. Management's Discussion and Analysis or Plan of Operation
All statements contained herein (other than historical facts) including,
but not limited to, statements regarding the Company's future development
plans, the Company's ability to generate cash from its operations and any
losses related thereto, are based upon current expectations. These statements
are forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements. Generally,
the words "anticipate," "believe," "estimate," "expects," and similar
expressions as they relate to the Company and/or its management, are intended
to identify forward looking statements. Among the factors that could cause
actual results to differ materially are the following: the inability of the
Company to obtain additional financing to meet its capital needs; competition
in the automotive maintenance industry; and general business and economic
conditions.
Results of Operations -- Year Ended April 30, 1998 vs. Year Ended April 30,
1997
Net sales increased by $.3 million or 1.3% to $23.27 million for the
fiscal year ended April 30, 1998, as compared to $22.96 for fiscal year ended
April 30, 1997. This was the result of increases in the Company's core
operations (mechanical repairs, glass replacement and auto rentals) as well as
continued growth in its insurance subrogation division and its MVR service
accounts. This was partially offset by a reduction in the number of accidents
reported by our Corporate customers.
The Company's gross margin of 18.9% was .14 percentage points higher than
the previous year level of 18.8%. This increase was attributable to increases
in those areas which yield a higher gross margin than that of other segments of
its core business. Such departments are subrogation, MVR reporting and fees
charged for specialized reports available to all fleet customers.
General and administrative expenses for the fiscal year ended April 30,
1998, of $4.5 million was $.51 million less than the previous year. This 10.16%
decrease was attributable to a 29.9% reduction in the Company's workforce. Such
a reduction decreased salaries by more than $.582 million which had a
corresponding effect on most of the Company's other administrative expenses.
Non-cash imputed compensation of $.400 million for year ended April 30,
1998 is attributable to the value of Common Stock issued as compensation to
outside consultants. There was no comparable expense for the prior year.
II-2
Interest expense of $400,660 for year ended April 30, 1998, was $21,004
higher than the previous year. This 5.5% increase was partially attributable to
the interest charged on a loan to a former officer of the Company.
Net Loss, Liquidity and Capital Resources
Net cash flows used in operating activities were $539,242 for the year
ended April 30, 1998, as compared to $57,194 for the comparable prior period.
This change of $482,048 resulted primarily from changes in accounts receivable,
accrued expenses, accounts payable and compensation relating to the issuance of
Common Stock to outside consultants.
Net cash flows used in investing activities were $54,423 for the year
ended April 30, 1998, as compared to $105,346 for the comparable prior period.
This difference of $50,923 was primarily attributable to a reduction in capital
expenditures as well as a decrease in security deposits.
Net cash flows provided by financing activities were $523,670 for the year
ended April 30, 1998 as compared to $213,955 for the comparable prior year.
This was primarily the result of an increase in the Bank overdraft, in addition
to increased borrowing from our finance company.
The Company has suffered a loss for the fiscal year ended April 30, 1998,
and has negative working capital. The Company has limited availability under
its existing credit facility and the Company will need additional capital to
have sufficient liquidity and to meet its working capital needs for the
foreseeable future.
The Company has sold its executive office and entered into a sale and
leaseback arrangement. This transaction has resulted in $253,400 of additional
working capital. In addition, the Company is currently negotiating to expand
its credit capacity with its current finance institution.
Results of Operations -- Year Ended April 30, 1997 vs. Year Ended April 30,
1996
Net sales decreased by $2.52 million or 9.81% to $22.96 million for the
fiscal year ended April 30, 1997, as compared to $25.48 million for fiscal year
ended April 30, 1996. This decrease resulted from the loss of several major
corporate accounts.
The Company's gross margin of 18.8% was 1.9 percentage points higher than
the previous year level of 16.9%. This increase resulted from the loss of one
of its corporate fleet customers that yielded a significantly lower gross
margin than standard.
General and administrative expenses for the fiscal year ended April 30,
1997, of $5.022 million was $1.16 million less than the previous year. This
18.7% decrease was attributable to significant expenditures incurred for
implementing the Company's plan for the development of service and products to
be provided to insurance companies, financial institutions and retail
consumers. In the future, the Company intends to restructure its operations and
management in order to minimize its expenditures and increase productivity.
Interest expense of $379,656 for year ended April 30, 1997, was $80,444
less than the previous year. This 17.4% decrease was partially attributable to
a decrease in the interest rate charged on the Company's revolving credit with
a finance company, in addition to the interest charged on the Company's loan to
an officer.
Net Loss, Liquidity and Capital Resources
Net cash flows used in operating activities were $57,194 for the year
ended April 30, 1997, as compared to $117,675 provided by operations for the
comparable prior period. This change of $174,869 resulted primarily from
changes in accounts receivable, refund on taxes, accrued expense and
compensation expense in the prior year relating to the sale of Common Stock.
Net cash flows used in investing activities were $105,346 for the Year
Ended April 30, 1997, as compared to $290,086 that was used in investing
activities for the comparable prior period. This difference of $184,740 was
attributable to the reduction in loans receivable due from an officer.
II-3
Net cash flows provided by financing activities were $213,955 as compared
to $21,629 that were provided by financing activities for the comparable prior
year. This was primarily the result of the acquisition and constructive
retirement of common stock and was partially offset by the issuance of
preferred stock.
The Company has suffered a loss for the fiscal year ended April 30, 1997,
and has negative working capital. The Company has limited availability under
its existing credit facility and the Company will need additional capital to
have sufficient liquidity and to meet its working capital needs for the
foreseeable future. It is the Company's intention to refinance its mortgage
liability on a short term basis. The Company expects to enter into a sale and
leaseback arrangement with respect to the property in the near future.
Impact of Inflation and Changing Prices
Although the Company cannot accurately predict the precise effect of
inflation on its operation, it does not believe inflation has had a material
effect on sales or results of operations.
Year 2000
Management believes that based on available information that the Company
will be able to handle the Year 2000 transition without any material adverse
effects on its business, operations or products.
A majority of the software used by the Company is owned by the Company.
With respect to such software, the Company is taking all the necessary actions
to make such software Year 2000 Compliant.
The Company's staff of programmers and systems people are converting all
software to the four digit year protocol necessary for the next millennium.
Such conversions are necessary for only ten percent of our system functions.
These conversions will be completed by March 31, 1999.
The impact of any software purchased from outside vendors is presently,
and in the future, evaluated on a case by case basis.
All imported data from our fleets or vendors that have only a two digit
year will be converted at the office of the Company to a four digit year. All
exported data will contain a four digit year unless the individual fleet or
vendor requires us to conform to their two digit year format.
Item 7A. Quantitative and Qualitative Disclosures about Market Research
Not Applicable.
Item 8. Financial Statements and Supplementary Data
See F-1 -- F-14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
II-4
SALEX HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
INDEX TO FINANCIAL STATEMENTS
Page #
-------
Independent auditor's report ............................................. F-2
Consolidated balance sheets
April 30, 1998 and 1997 ............................................... F-3
Consolidated financial statements for the three years ended April 30, 1998
Statements of operations .............................................. F-4
Statements of stockholders' equity and capital deficit ................ F-5
Statement of cash flows ............................................... F-6
Notes to consolidated financial statements ............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Salex Holdings Corp.
We have audited the accompanying combined consolidated balance sheets of
Salex Holdings Corp. as of April 30, 1998 and 1997, and the related combined
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended April 30, 1998. 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 combined consolidated 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 combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Salex
Holdings Corp. as of April 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1998, in conformity with generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
-------------------------------------
New York, New York Feldman Sherb Ehrlich & Co., P.C.
July 13, 1998, except Certified Public Accountants
for note 12, for which the date is (Formerly Feldman Radin & Co., P.C.)
December 23, 1998
F-2
SALEX HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
CONSOLIDATED BALANCE SHEET
ASSETS
April 30,
---------------------------------
1998 1997
--------------- ---------------
CURRENT ASSETS:
Cash ..................................................................... $ 55,774 $ 125,769
Accounts receivable, net of allowance for doubtful accounts of $238,000
in 1998 and $188,000 in 1997 ........................................... 3,347,504 3,451,589
Prepaid expenses and other current assets ................................ 97,824 77,263
------------ ------------
Total Current Assets .................................................. 3,501,102 3,654,621
------------ ------------
PROPERTY AND EQUIPMENT, net ............................................... 1,620,430 1,746,120
------------ ------------
OTHER NONCURRENT ASSETS:
Goodwill, net ............................................................ 1,113,125 1,210,625
Noncompetition and consulting agreement, net ............................. 86,667 186,667
Other assets ............................................................. 32,321 48,635
------------ ------------
1,232,113 1,445,927
------------ ------------
$ 6,353,645 $ 6,846,668
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft ........................................................... $ 856,365 $ 471,236
Note payable -- finance company .......................................... 1,728,294 1,283,699
Accounts payable ......................................................... 3,594,490 4,161,585
Accrued expenses and other ............................................... 437,006 487,260
Current portion of long-term debt ........................................ 1,018,589 1,179,906
------------ ------------
Total Current Liabilities ............................................. 7,634,744 7,583,686
------------ ------------
LONG-TERM DEBT:
Long-term debt ........................................................... 30,059 71,000
Mortgage payable ......................................................... -- --
Capital leases obligations ............................................... 5,101 33,155
Note payable ............................................................. 521,120 676,948
------------ ------------
556,280 781,103
------------ ------------
DEFERRED INCOME TAXES ..................................................... 10,000 10,000
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred stock-series A, $.01 par value -- shares authorized 20,000,
issued and outstanding 1,625 and 10,625, respectively (liquidation
preference $100 per share) ............................................. 110,608 737,387
Preferred stock-series B, $.01 par value -- shares authorized, issued and
outstanding 0 and 1,000, respectively .................................. -- 10
Preferred stock-series C, $.01 par value -- shares authorized, issued and
outstanding 25,000 ..................................................... 250 --
Common stock, $.01 par value -- shares authorized 39,000,000 ............. 130,048 91,873
Additional paid-in capital ............................................... 4,514,527 3,501,163
Accumulated deficit and proprietor's capital deficiency .................. (6,102,812) (5,358,554)
Less: Note receivable .................................................... (500,000) (500,000)
------------ ------------
Total stockholders' deficit ........................................... (1,847,379) (1,528,121)
------------ ------------
$ 6,353,645 $ 6,846,668
============ ============
See notes to financial statements.
F-3
SALEX HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended April 30,
----------------------------------------------------
1998 1997 1996
-------------- ---------------- ----------------
Net sales ............................................ $23,272,987 $ 22,958,814 $ 25,481,629
Cost of sales ........................................ 18,866,443 18,642,887 21,174,290
----------- ------------ ------------
Gross profit ......................................... 4,406,544 4,315,927 4,307,339
Selling, general & administrative expenses ........... 4,170,708 4,669,128 5,892,493
Depreciation and amortization ........................ 338,841 352,629 294,973
Non-cash imputed compensation ........................ 400,000 -- --
----------- ------------ ------------
Income (loss) from operations ........................ (503,005) (705,830) (1,880,127)
Interest expense, net ................................ 400,660 379,656 460,100
Other income ......................................... (162,125) -- --
----------- ------------ ------------
Loss before taxes .................................... (741,540) (1,085,486) (2,340,227)
Taxes ................................................ 2,718 1,062 58,686
----------- ------------ ------------
Net loss to common shareholders ...................... (744,258) (1,086,548) (2,398,913)
Accretion of preferred stock dividends attributable to
increase to conversion value ........................ -- (1,062,500) --
----------- ------------ ------------
Net loss to common shareholders ...................... $ (744,258) $ (2,149,048) $ (2,398,913)
=========== ============ ============
Basic loss per share of common stock ................. $ (0.06) $ (0.19) $ (0.21)
=========== ============ ============
Weighted average common shares outstanding ........... 13,004,770 11,246,366 11,246,366
=========== ============ ============
See notes to financial statements.
F-4
SALEX HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
STATEMENT OF STOCKHOLDERS' DEFICIT (CAPITAL DEFICIT)
Preferred Stock Preferred Stock
Series A Series B ($.01 par)
-------------------------- ---------------------
Balance, April 30, 1995 .............................. -- -- -- --
Sale of common stock ................................
Compensation related to sale of shares ..............
Net loss ............................................
Balance, April 30, 1996 .............................. -- -- -- --
------ ----------- ------ ------
Acquisition and constructive retirement of
treasury stock purchased from principal
shareholder ........................................
Reserve stock split and issuance of series B
preferred stock .................................... -- -- 1,000 $ 10
Acquisition of Synergistic Holding Corporation
and constructive retirement of treasury stock ......
Private placement of preferred stock and
warrants net of related expenses ................... 10,625 $ 737,387
Accretion of preferred stock to conversion value
Net loss ............................................
------ ----------- ------ ------
Balance, April 30, 1997 .............................. 10,625 $ 737,387 1,000 $ 10
Conversion of Series A preferred to common
stock .............................................. (9,000) (626,779)
Conversion of Series B preferred to common
stock .............................................. (1,000) (10)
Issuance of series C preferred stock ................
Net Loss ............................................
------ ----------- ------ ------
Balance, April 30, 1998 .............................. 1,625 $ 110,608 -- --
====== =========== ====== ======
Preferred Stock Common Stock Paid-In
Series C ($.01 par) ($.01 par) Capital
------------------ ----------------------------- ---------------
Balance, April 30, 1995 .............................. -- -- 5,356,200 53,562 1,958,438
Sale of common stock ................................ 2,543,800 25,438 1,206,562
Compensation related to sale of shares .............. 786,546
Net loss ............................................
------ ---- ------------ --------- -------------
Balance, April 30, 1996 .............................. -- -- 7,900,000 79,000 3,951,546
Acquisition and constructive retirement of
treasury stock purchased from principal
shareholder ........................................ (1,453,600) (14,536) (1,985,464)
Reserve stock split and issuance of series B
preferred stock .................................... -- -- (715,550) (7,155) 7,145
Acquisition of Synergistic Holding Corporation
and constructive retirement of treasury stock ...... 3,456,410 34,564 465,436
Private placement of preferred stock and
warrants net of related expenses ...................
Accretion of preferred stock to conversion value 1,062,500
Net loss ............................................
------ ---- ------------ --------- -------------
Balance, April 30, 1997 .............................. -- -- 9,187,260 $ 91,873 $ 3,501,163
Conversion of Series A preferred to common
stock .............................................. 1,758,404 17,584 609,195
Conversion of Series B preferred to common
stock .............................................. 2,059,106 20,591 (20,581)
Issuance of series C preferred stock ................ 25,000 $250 424,750
Net Loss ............................................
------ ---- ------------ --------- -------------
Balance, April 30, 1998 .............................. 25,000 $250 $ 13,004,770 $ 130,048 $ 4,514,527
====== ==== ============ ========= =============
(Capital Note
deficit) Receivable Total
--------------- -------------- ---------------
Balance, April 30, 1995 .............................. (810,593) -- 1,201,407
Sale of common stock ................................ 1,232,000
Compensation related to sale of shares .............. 786,546
Net loss ............................................ (2,398,913) (2,398,913)
---------- ---------- ----------
Balance, April 30, 1996 .............................. (3,209,506) -- 821,040
Acquisition and constructive retirement of
treasury stock purchased from principal
shareholder ........................................ (2,000,000)
Reserve stock split and issuance of series B
preferred stock .................................... --
Acquisition of Synergistic Holding Corporation
and constructive retirement of treasury stock ...... (500,000) --
Private placement of preferred stock and
warrants net of related expenses ................... 737,387
Accretion of preferred stock to conversion value (1,062,500) --
Net loss ............................................ (1,086,548) (1,086,548)
---------- ---------- ----------
Balance, April 30, 1997 .............................. ($ 5,358,554) ($ 500,000) ($ 1,528,121)
Conversion of Series A preferred to common
stock .............................................. --
Conversion of Series B preferred to common
stock .............................................. --
Issuance of series C preferred stock ................ 425,000
Net Loss ............................................ (744,258) (744,258)
---------- ---------- ----------
Balance, April 30, 1998 .............................. ($ 6,102,812) ($ 500,000) ($ 1,847,379)
=========== ========= ===========
See notes to financial statements.
F-5
SALEX HOLDINGS CORP.
AND SUBSIDIARIES AND AFFILIATE
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended April 30,
------------------------------------------------------
1998 1997 1996
--------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $ (744,258) $ (1,086,548) $ (2,398,913)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 338,841 352,629 294,973
Provision for doubtful accounts ...................... 50,000 -- 31,000
Deferred income taxes ................................ -- -- (1,000)
Compensation related to sale of share ................ 400,000 -- 786,546
Increase (decrease) in cash flows from changes in
operating assets and liabilities:
Accounts receivable .................................. 54,085 (232,680) 57,360
Prepaid expenses and other current asssets ........... (20,561) 12,998 58,554
Refundable taxes ..................................... -- 58,239 239,022
Accounts payable ..................................... (567,095) 838,019 921,908
Accrued expenses and other current liabilities ....... (50,254) 149 128,225
----------- ------------ -------------
Net cash provided by (used in) operating activities ..... (539,242) (57,194) 117,675
----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ............................ (15,651) (50,260) (63,626)
Decrease (increase) in other assets .................. 16,314 -- (600)
Loan to officer, net of repayments ................... (55,086) (55,086) (225,860)
----------- ------------ -------------
Net cash used in investing activities ................... (54,423) (105,346) (290,086)
----------- ------------ -------------
(593,665) (162,540) (172,411)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft ............................. 385,129 25,796 (757,514)
Net proceeds from (repayments of) note payable
-- finance company ................................ 444,595 (172,744) (232,062)
Principal payments on long-term debt ................. (197,635) (210,687) (54,753)
Payments on capital leases obligations ............... (61,419) (61,363) (58,906)
Payments on mortgage obligation ...................... (72,000) (72,000) (72,000)
Distribution to stockholders ......................... -- -- 89,181
Proceeds from promissory note -- Bank ................ -- (32,433) (35,135)
Net proceeds from issuance of preferred stock......... 25,000 737,386 --
Net proceeds from issuance of common stock ........... -- -- 1,142,818
----------- ------------ -------------
Net cash provided by (used in) financing activities ..... 523,670 213,955 21,629
----------- ------------ -------------
Net increase (decrease) in cash ......................... (69,995) 51,415 (150,782)
Cash, at beginning of period ............................ 125,769 74,354 225,136
----------- ------------ -------------
Cash, at end of period .................................. $ 55,774 $ 125,769 $ 74,354
=========== ============ =============
SUPLEMENTARY CASH FLOW DISCLOSURE
Interest paid ..................................... $ 403,293 $ 379,656 $ 460,000
=========== ============ =============
Taxes paid ........................................ -- -- $ 33,000
=========== ============ =============
See notes to financial statements.
F-6
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business
Salex Holdings Corp. (the "Company") operates in the automobile asset
management industry. Through the Company's "Corporate Fleet Program" it
manages, on a nationwide basis, the maintenance and repair of fleets of
automobiles which are owned and operated by corporate customers. The Company
maintains a nationwide "Service Network" of over 30,000 independently owned
pre-screened and pre-approved maintenance and repair centers. The Company
receives a monthly management fee from its corporate customers as well as
fees from its service network. Other services of the Company include the
Collision Management Program, the Computerized Auction System and Collateral
Service Shield and the Insurance Subrogation Program.
b. Basis of Presentation and Principles of Combination and Consolidation
Pursuant to the merger agreement dated September 19, 1996 Salex Industries,
Inc. ("SII") a wholly-owned subsidiary of Synergistic Holdings Corp. was
merged with and into Salex Holding Corporation (Salex) whereby all of the
shares of common stock of Salex held by the Company were canceled and all of
the 4,503,000 shares of common stock owned by the Salex Stockholders were
converted into (a) 4,003,165 shares of common stock, par value $.01 per share
and (b) 1,000 shares of Series B Convertible Preferred Stock.
Immediately after the closing, the Company, pursuant to a Stock and Asset
Purchase Agreement with Dickinson Holding Corporation ("Dickinson"), a
Delaware corporation, sold ( the "Divestiture") all of the outstanding shares
of its subsidiary, Dickinson & Co., Inc. ("DCI"), a registered broker/dealer
and its investment in Electronic Designs, Inc. ("EDI"). As consideration for
the stock and assets that were transferred in connection with the
divestiture, Dickinson transferred to the Company 750,000 shares of its
Synergistic Common Stock and a $500,000 promissory note secured by 250,000
shares of its Synergistic Common Stock pursuant to a Pledge Agreement between
Dickinson and the Company.
Because the Company's only asset after the Divestiture was its investment in
Salex and its collateralized promissory note from Dickinson., the Company was
deemed to be in substance a "shell" at the Closing of the merger. The SEC
believes that shells are not businesses and therefore, cannot initiate
business combinations. For accounting purposes the SEC views the transaction
as an equity transaction by the private operating company ("Salex") rather
than as an acquisition of Salex by the Company. The SEC requires that the net
assets of the public shell be recorded at carryover basis in which no
goodwill arises on the transaction. Accordingly the merger transaction has
been accounted for as a recapitalization of Salex (stock split, distribution
of preferred stock, and treasury stock purchase) followed by an issuance of
common stock by Salex in exchange for treasury stock and Synergistic's note
receivable from Dickinson. The note receivable, which is collateralized by
Salex stock, has been recorded as a reduction of additional paid-in capital.
c. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization are
provided on either the straight-line basis or accelerated methods over the
estimated useful lives of the assets.
d. Taxes on Income
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases (temporary
differences) and operating loss and tax credit carry forwards. These
temporary differences arise primarily from the allowance for doubtful
accounts provision and differences in depreciation methods between the
financial statements and the depreciation utilized on the Company tax
returns. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance
has been provided to reduce the deferred tax assets to a level that will be
realized.
F-7
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
e. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
f. Revenue Recognition
The Company's principal revenues are derived from billings for repairs and
maintenance for vehicles covered in its fleet management program. Revenues
are recorded when the services have been rendered.
g. Goodwill
The excess of cost over fair value of net assets acquired is being amortized
on the straight-line method over a twenty year period. Amortization of
goodwill for each of the years ended April 30, 1998, 1997 and 1996 amounted
to $97,500.
The Company's operational policy for the assessment and measurement of any
impairment in the value of excess of cost over fair value of net assets
acquired which is other than temporary is to evaluate the recoverability and
remaining life of its goodwill and determine whether the goodwill should be
completely or partially written-off or the amortization period accelerated.
The Company will recognize an impairment of goodwill if undiscounted
estimated future operating cash flow of the Company is determined to be less
than the carrying amount of goodwill. If the Company determines that goodwill
has been impaired, the measurement of the impairment will be equal to the
excess of the carrying amount of the goodwill over the amount of the
discounted estimated operating cash flow using the Company's average cost of
funds. If an impairment of goodwill were to occur, the Company would reflect
the impairment through a reduction in the carrying value of goodwill. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
h. Noncompetition and Consulting Agreements
Amortization is provided over the three to five year contractual lives of the
agreements. Amortization of the agreements was $100,000, $83,333 and $60,000
for the years ended April 30, 1998, 1997 and 1996 respectively.
i. Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash,
accounts receivable and payable, and short-term debt, approximated fair value
as of April 30, 1997 and 1998. The carrying value of long-term debt,
including the current portion, approximated fair value as of April 30, 1997
and 1998, based on the borrowing rates currently available to the Company for
bank loans with similar terms and maturities.
j. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No.123, "Accounting for Stock-Based Compensation," which is effective for
transactions entered into after December 31, 1995. Statement No.123
establishes a fair value method of accounting for stock-based compensation,
through either recognition or disclosure. The Company adopted the employee
stock-based compensation disclosure-only provisions of Statement No. 123 in
fiscal 1997 by disclosing the pro forma net income amounts assuming the fair
value method was adopted May 1, 1996. The adoption of Statement No. 123 did
not impact the Company's results of operations, financial position or cash
flows.
F-8
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
k. Earnings Per Share
The Company has adopted the provisions of Financial Accounting Standard No.
128, "Earnings per share", which became effective for financial statements
for fiscal years ending after December 15, 1997.
Basic earnings per share are based on the weighted average number of common
and common equivalent shares outstanding. The diluted calculation when
applicable takes into account the shares that may be issued upon exercise of
stock options and warrants, reduced by the shares repurchased with the funds
received from their exercise.
l. Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. The Company's largest customer accounts for approximately 7% of
accounts receivable at April 30, 1998. The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
April 30,
-----------------------------
1998 1997
------------- -------------
Land ................................................... $ 490,000 $ 490,000
Building ............................................... 1,227,261 1,227,261
Furniture & Fixture .................................... 1,419,060 1,417,052
Vehicles ............................................... 91,404 77,760
Leasehold improvements ................................. 21,920 21,920
---------- ----------
3,249,645 3,233,993
Less accumulated depreciation and amortization ......... 1,629,215 1,487,873
---------- ----------
$1,620,430 $1,746,120
========== ==========
3. NOTE PAYABLE -- FINANCE COMPANY
The Company has a $2,250,000 revolving credit agreement with a finance
company, which renews annually on January 1. Interest on borrowings are at
prime plus 2% or 10.25% at April 30, 1998 and 1997. Borrowings are
collateralized by substantially all of the Company's assets not otherwise
encumbered and are personally guaranteed by the Company's principal
stockholder.
F-9
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
1998 1997
------------ ------------
Mortgage payable to bank, payable in monthly installments of $6,000
through December 1997, plus interest at 2% above the bank's "peg rate"
(10.75% at April 30, 1996). The balance of $792,203 was due January 20,
1998. The bank did not renew this mortgage and has demanded payment
and the Company is in default and trying to refinance it. The mortgage is
collateralized by land and building with a book value of $1,423,031 at
April 30, 1998. ............................................................ $ 768,203 $ 840,203
Consulting and Noncompetition agreement was payable in monthly
installments of $5,000 through November 1998. Company did not pay last
six installments and renegotiated agreement in June 1998. According to
new term and conditions the Company will pay $10,000 in the beginning
of next fiscal year. Remaining $45,000 will be paid over eighteen (18)
months in semi-monthly installments of $1352.35 including interest at
10.5%. ..................................................................... 55,000 90,000
Capital lease obligations with varying monthly payments and interest rates
ranging from 15% to 17% per annum maturing 1998 through 2000; secured
by interests in computer equipment. ........................................ 33,099 94,518
Promissory note payable to bank in monthly installments of $2,703, plus
interest, through April 1998; interest at prime plus 2% (10.25% at April 30,
1996); secured by an interest in computer equipment. Promissory note was
paid off as of April 30, 1998. ............................................. -- 29,729
Buy out agreement payable in monthly installments of $4,000 through
September. 1998 and then $1,750 through September 1999. .................... 41,619 89,000
Note payable in quarterly installments of $55,086 including interest at 11%. 676,948 817,559
--------- ---------
1,574,869 1,961,009
Less: Current maturities of long-term debt and capital lease obligations ... 1,018,589 1,179,906
--------- ---------
$ 556,280 $ 781,103
========= =========
The following is a schedule by years of future minimum lease payments
under capital leases, together with the present value of the net minimum lease
payments as of April 30, 1998:
Year ending April 30,
---------------------
1999 ......................................... $31,202
2000 ......................................... 5,200
-------
Total minimum lease payments ....................... 36,402
Less: amount representing interest ................. 3,303
-------
Present value of net minimum lease payment ......... $33,099
=======
F-10
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS -- (Continued)
The following is a schedule of long-term debt maturities (including
capital lease obligations) as of April 30, 1998:
Year ending April 30,
---------------------
1999 ................................ 207,855
2000 ................................ 191,385
2001 and thereafter ................. 157,040
-------
$556,280
========
5. MAJOR CUSTOMERS
For the year ended April 30, 1998, one customer accounted for 10% of net
sales.
6. EMPLOYMENT AGREEMENTS
Upon termination of the Company's previous employment agreements, the
Company entered into new employment agreements with five officers and employees
which provide for automatic annual renewals and no fixed salary. Current annual
salary levels under each of these agreements are $75,000.
7. RETIREMENT PLANS
The Company has a 401(K) plan for eligible salaried employees. The
contribution for any participant may not exceed statutory limits. During fiscal
years ended April 30, 1996 the Company matched each employee participant's
contributions up to the first 6% of compensation. No matching contributions
were recorded for the year ended April 30, 1998 and 1997. The total matching
contributions charged against operations approximated $60,000 for the year
ended April 30, 1996.
8. TAXES ON INCOME
The provisions for (recoveries of) taxes on income in the consolidated
statements of operations consist of the following:
Year Ended April 30,
--------------------------------
1998 1997 1996
-------- -------- ----------
Current:
Federal ....................................... $ -- $ -- $ 50,733
State ......................................... 2,218 1,062 8,953
------ ------ --------
Total current .............................. 2,218 1,062 59,686
Deferred:
Federal ....................................... -- -- (850)
State ......................................... -- -- (150)
------ ------ --------
Total deferred ............................. -- -- (1,000)
------ ------ --------
Total taxes on income (recoveries) ......... $2,218 $1,062 $ 58,686
====== ====== ========
F-11
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
8. TAXES ON INCOME -- (Continued)
Significant components of the Company's deferred tax assets and
liabilities are as follows:
April 30,
-----------------------------------------------
1998 1997 1996
--------------- ------------- -------------
Deferred tax assets:
Receivable reserve .................................. $ 75,000 $ 75,000 $ 75,000
Net operating loss carryforwards .................... 954,000 886,000 515,000
------------ ---------- ----------
Total deferred tax asset ......................... 1,029,000 961,000 590,000
Valuation allowance for deferred tax assets ......... (1,029,000) (961,000) (590,000)
------------ ---------- ----------
Net deferred tax asset ........................... $ -- $ -- $ --
============ ========== ==========
Deferred tax liability:
Depreciation ........................................ $ 10,000 $ 10,000 $ 27,000
------------ ---------- ----------
Noncurrent deferred income tax liability ......... $ 10,000 $ 10,000 $ 27,000
============ ========== ==========
The provision for taxes on income (loss) before taxes differs from the
amounts computed applying Federal statutory rates due to the following:
Year Ended April 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Provision for Federal income taxes at the statutory rate ......... (34%) (34%) (34%)
Loss (income) earned by S Corporation taxable to individual
stockholders .................................................... 0 0 0
Adjustment for under (over) accrual from prior year .............. 0 0 (3)
State taxes, net of Federal tax benefit .......................... (6) (6) (6)
Non-deductible expenses .......................................... 5 9 16
Valuation allowance for deferred tax assets ...................... 35 31 24
--- --- ---
Provision for taxes on income .................................... 0% 0% 3%
=== === ===
As of April 30, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2,300,000, expiring in the year
2013.
The Company has established valuation allowances equal to its deferred tax
assets because of the uncertainty as to their future utilization.
9. STOCKHOLDERS' EQUITY
In January 1998, the Company amended its Certificate of Incorporation to
increase the authorized common stock to 39,000,000 shares and the preferred
stock authority to 1,000,000 shares.
The Company in an effort to raise additional capital issued its series A
convertible Preferred Stock pursuant to a private placement offering dated July
9, 1996. The shares are redeemable solely at the option of the Company based on
a redemption value of $100 plus any accrued but unpaid dividends. The Series A
Preferred Stock sold in 250 share "units" which includes 25,000 Warrants per
unit each exercisable for 1 share of Common Stock at an exercise price of $4.75
per Warrant.
Each share of the Series A Preferred Stock is convertible based on the
average price of the common stock for the (10) day trading period immediately
preceding the conversion but in no event less than $0.50 per share. Preferred
shareholders are able to convert the series A preferred stock at twice its
liquidation preference. The
F-12
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
9. STOCKHOLDERS' EQUITY -- (Continued)
substance of this adjustment to the series A preferred stock is that of a 100%
stock dividend. Accordingly the Company has recorded accretion to increase paid
in capital and charge retained earnings for the amount of the adjustment.
During the fiscal year ended April 30, 1998, a total of 9,000 shares of Series
A Preferred stock were converted into 1,758,404 shares of common.
As part of the merger agreement all of the issued and outstanding shares
of Salex Holding Corp. were converted into shares of Salex Common Stock and as
part of a reverse stock split, 1,000 shares of series B Convertible Preferred
Stock. Each share of the series B Preferred Stock automatically converted into
2,059.106 shares of Salex Common Stock as soon as the Company amended its
certificate of incorporation increasing the authorized Common Stock of the
Company.
During May 1997 the Board of Directors of the Company adopted a resolution
providing for the authorization and issuance of 25,000 shares of its $.01 par
value Series C Preferred Stock. The Preferred Stock has an issue price of $1.00
per share and each share issued is convertible into 100 shares of Common Stock.
The Series C Preferred Stock shall rank prior to all of the Company's $.01par
value common stock. The 25,000 shares of Preferred stock were issued in May in
connection with a consulting agreement.
The Series A Preferred are entitled to dividends of 8.5% per year. As of
April 30, 1998 no payment or accrual of these dividends has been recorded
because under Delaware Law the Company can not legally pay dividends unless
there is sufficient retained earnings or current profits from which the
dividends can be distributed. Said dividends although unpaid are cumulative and
will become payable to the preferred stockholders at such time in which the
Company has restored its capital deficiency. The amount of unpaid dividends
otherwise applicable to the period ended April 30,1998 was approximately
$55,000.
10. STOCK BASED COMPENSATION
The following table summarizes the changes in options and warrants
outstanding and the related price range for shares of the Company's common
stock.
Stock Options and Warrants
Options Warrants Price
------------- ------------ ---------------
Outstanding at April 30, 1994 ................... 247,000 173,500
Granted ......................................... -- --
Exercised ....................................... -- --
Expired ......................................... (67,000) (57,832)
Retired ......................................... -- --
------- -------
Outstanding at April 30, 1995 ................... 180,000 115,668
Granted ......................................... 58,300 $ 2.00
Granted ......................................... 625,000 $ 2.00
Exercised ....................................... -- --
Expired ......................................... (66,000) 115,668
------- -------
Retired ......................................... -- --
------- -------
Outstanding at April 30, 1996: .................. 172,300 625,000
Granted ......................................... 1,129,333 $ 1.00-2.12
Granted ......................................... 1,062,500 $ 4.75
Exercised ....................................... -- --
Expired ......................................... (500,000) --
Retired ......................................... -- --
Outstanding at April 30, 1997 and 1998 ..........
--------- ---------
801,633 1,687,500
========= =========
F-13
SALEX HOLDINGS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
10. STOCK BASED COMPENSATION -- (Continued)
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. As such, compensation
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has adopted the
disclosure only provisions of SFAS 123 "Accounting for Stock Based
Compensation". Accordingly, no compensation cost has been recognized for the
plan. Had compensation cost for the Company's option plans been determined
based on fair value at the grant date for the awards consistent with the
provisions of SAS 123, the Company's net loss and net loss per share would have
been increased by $515,547 and $.05 for the year ended April 30, 1997 and not
effected for the fiscal year ended April 30, 1998.
The fair value of each option grant is estimated based on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants: No dividend yield; expected volatility of .87%;
risk free interest rate of 6%; and expected lives of 3 years.
11. CONSULTING AGREEMENT
In May 1997, the Company entered into a consulting agreement with Meadows
Management ("Meadows") for a two year period at $2,000 per week. In addition to
the fee arrangement, Meadows received 25,000 shares of Series C Preferred Stock
for $1.00 per share, each of which are convertible into 100 shares of common
stock. The Company attributed a value of $425,000 to the stock, with the excess
of $400,000 over the amount paid recorded as prepaid compensation.
Subsequently, in December 1997, the Company terminated the arrangement because
of its belief of non performance by Meadows. Any remaining prepaid compensation
related to the stock was written off to expense upon termination. The Company
has been attempting to get the stock back from Meadows.
12. SUBSEQUENT RELATED PARTY TRANSACTIONS
Sale of Building
On December 23, 1998, the Company entered into a real estate purchase
agreement ("Purchase Agreement") by and among the Company, Salvatore Crimi and
Sun Associates, LLC ("Sun"), a company controlled by Betty Sun, (as record
title holder) who is the wife of Pershing Sun a director of the Registrant. The
Company has agreed to sell the property for $1,100,000. A portion of the
proceeds was used to pay the mortgage securing the property. The balance was
used for working capital. Simultaneously with this sale the Company and Sun
entered into a lease agreement (the "Lease Agreement") pursuant to which Sun
leased the property to the Company. The annual basic rent for the period
December 31, 1998 ending December 31, 1999 is $168,000. Annual rent increases
will not be greater than $8,985 per year. The Company has a repurchase option
(the "Option") to repurchase the property up to June 23, 1999 for $1,155,000
net of Sun Associates' transaction costs, based on the Company being in
compliance with certain covenants. The Option provides that if Sun Associates
sells the property prior to December 31, 1999, 50% of the profits go to the
Company based on the Company being in compliance with certain covenants.
F-14
PART III
Item 10. Directors and Executive Officers of the Company
The following table sets forth certain information concerning each nominee
for the office of Director, each Director and each executive officer of the
Company:
Name Age Position
---- --- --------
Salvatore Crimi .............. 73 Chief Executive Officer and Chairman of the Board
of Directors
Pershing Sun ................. 55 President and Director
Angelo Crimi ................. 46 Secretary and Director
Franklin Pinter .............. 48 Director
Syd Mandelbaum ............... 48 Director
Francis Fitzpatrick .......... 57 Director
Salvatore Crimi has served as the Chairman of the Board of Directors and
Chief Executive Officer of the Company since September 18, 1996. From 1974 to
1996 Mr. Crimi served as Chairman of the Board and Chief Executive Officer of
Salex Holding Corporation a corporate entity separate and distinct from the
Company (the "Prior Company"). He is the father of Angelo Crimi, Secretary of
the Company.
Pershing Sun has served as a Director of the Company and Chief Information
Officer of the Company since September 18, 1996. In March 1998, Mr. Sun was
also appointed President of the Company. From September 1996, until March 1998,
Mr. Sun served as Senior Vice President of the Company. From 1991 to 1996 Mr.
Sun served as Chief Information Officer of the Prior Company.
Angelo Crimi has served as Secretary of the Company since September 18,
1996. From September 1996 until March 1998. Mr. Crimi was Vice President of the
Company and from September 1996 until June 1998, Mr. Crimi was a Director of
the Company. From 1995 to September 1996 Mr Crimi served as President of the
Prior Company. Mr. Crimi is the son of Salvatore Crimi.
Franklin T. Pinter has served as a Director of the Company since January
7, 1997. From 1984 to the present Mr. Pinter has served as a Financial
Consultant and Estate Planner with the firms of Merrill Lynch and Arnone, Lowth
& Fanning.
Francis Fitzpatrick has served as a Director of the Company since
September 18, 1996. Mr. Fitzpatrick has served as a Vice President of
Fitzpatrick Brothers Corporation, an auto collision repair facility, since
1982.
Syd Mandelbaum has served as a Director of the Company since December 29,
1997. Mr. Mandelbaum has been an account executive for Toshiba American Medical
Systems since 1997. From 1993 to 1997 Mr. Mandelbaum served as a laser flow
cytometry specialist with the Coulter Corporation. Form 1990 to 1993 Mr.
Mandelbaum was a Vice President of Cell Measurement Systems for Imager
Instrumentation.
FILING DISCLOSURE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
and the rules thereunder require officers and directors of companies with
securities registered under the Exchange Act and persons who own more than 10%
of such companies' common stock to file reports of ownership and changes in the
ownership with the Securities and Exchange Commission and to furnish the
Company with copies.
Based upon its review of the copies of such forms received by it, or
written representation from certain reporting persons, the Company believes
that, during the last fiscal year, all filing requirements applicable to its
officers, directors, and greater than 10% beneficial owners were complied with.
III-1
Item 11. Executive Compensation
The following table sets forth the cash and non-cash compensation awarded
to or earned by the Chief Executive Officer during fiscal years ended April 30,
1998 and 1997, and the most highly compensated executive officers of the
Company earning at least $100,000 per year during fiscal year ended April 30,
1998.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------------- -----------------------
Awards
Other Securities
Fiscal Annual Underlying
Name & Principal Position Year Salary Compensation Options/SAR's
------------------------- ---- ------ ------------ -------------
($) ($) (#)
Salvatore Crimi,
Chairman of the Board and 1998 $ 140,000(1) $ 10,072(3) --
Chief Executive Officer ......... 1997 $ 95,866(2) $ 12,214(4) 79,610
Pershing Sun, 1998 $ 120,000(5) $ 8,449(6) --
President ....................... 1997 $ 66,365(2) $ 12,299(7) --
Angelo Crimi, 1998 $ 100,000(8) $ 11,477(9) --
Secretary ....................... 1997 $ 67,654(2) $ 11,782(10) --
- ------------
(1) Includes $47,946 representing accrued but unpaid salary.
(2) Includes the compensation earned prior to the acquisition by the Company
of the prior Company on Sepember 18, 1996.
(3) Includes $6,110 representing car and commuting allowance and $3,962
representing the value of certain health insurance benefits provided by
the Company.
(4) Includes $7,041 representing car and commuting allowance and $5,173
representing the value of certain health insurance benefits provided by
the Company.
(5) Includes $34,615 representing accrued but unpaid salary.
(6) Includes $4,207 representing car and commuting allowances and $4,242
representing the value of certain health insurance benefits provided by
the Company.
(7) Includes $4,750 representing car and commuting allowances and $7,549
representing the value of certain health insurance benefits provided by
the Company.
(8) Includes $21,154 representing accrued but unpaid salary.
(9) Includes $5,212 representing car and commuting allowances and $6,264
representing the value of certain health insurance benefits provided by
the Company.
(10) Includes $5,686 representing car and commuting allowances and $6,096
representing the value of certain health insurance benefits provided by
the Company.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE*
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Year-End Options at Fiscal Year-End
(#) ($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Salvatore Crimi ......... 31,844 47,766 -- --
Pershing Sun ............ 15,190 22,706 -- --
Angelo Crimi ............ -- -- -- --
- ------------
(1) Calculated based on the average closing bid and ask prices as quoted the
OTC Bulletin Board for the last business day of the fiscal year ($.017 per
share) less the exercise price payable for such shares.
III-2
Directors' Compensation
Directors of the Company receive compensation for serving on the Board of
Directors or any of its committees. Each non-employee director also receives
options, as a formula grant, to purchase 5,000 shares of Common Stock at an
exercise price equal to their market value on the first trading day of each
May.
Employment Contracts and Termination of Employment and Change-In-Control
Agreements
Salvatore Crimi
On April 24, 1998 the Company entered into a new employment agreement with
Salvatore Crimi, for the fiscal year ending April 30, 1999. Mr. Crimi's
employment agreement provides for his appointment as Chief Executive Officer
for a one year term which ends on April 30, 1999. The term is automatically
extended for additional one-year periods unless either party gives written
notice to the other of its desire not to renew such term which notice must be
given no later than ninety (90) days prior to the end of each term on any such
renewal. The agreement provides that Mr. Crimi receive an annual base salary at
the rate of $75,000. The agreement provides that the Company reserves the right
to adjust Mr. Crimi's salary during the term of the agreement. To demonstrate
his commitment to the Company during the fiscal year ended April 30, 1997, Mr.
Crimi reduced his base salary approximately 31.52% from $140,000 to $95,866.
In the event that the Company terminates Mr. Crimi's employment, other
than for cause, or Mr. Crimi terminates his employment as a result of a breach
by the Company of the agreement, Mr. Crimi will be paid severance compensation
equal to his annual base salary (at the rate payable at the time of such
termination) and accrued benefits plus an amount equal to the lesser of one
year's full base salary (as in effect at the time of such termination) and any
other amounts owed to him under the agreement or the full base (as in effect at
the time of such termination) and any other amounts that would have been
payable to Mr. Crimi from the date of termination through the original stated
expiration date of the employment agreement. In the event that the Company
terminates Mr. Crimi's employment for cause or Mr. Crimi shall terminate his
employment for reasons other than a breach of the agreement by the Company, the
Company shall pay Mr. Crimi his full base salary and accrued benefits through
the date of termination at the rate in effect at the time notice of termination
is given. For a period of two years following termination of Mr. Crimi's
employment for any reason (other than a termination by the Company without
cause) Mr. Crimi cannot perform services for or have an equity interest in
(except for an interest of 2% of less in an entity which is engaged in a
competitive business and which is publicly traded) any competitive business. In
addition, the Agreement provides that for the two year period following
termination of Mr. Crimi's employment for any reason, with or without cause,
Mr. Crimi cannot, directly or indirectly (including without limitation, as
owner employee, agent consultant or independent contractor) provide or solicit
services of the type provided by the Company to any of its existing customers
or potential customers with which or with whom the Company has negotiated
within the twelve months preceding the date of termination of Mr. Crimi's
employment.
Pershing Sun
On April 24, 1998, the Company entered into a new employment agreement
with Pershing Sun, for the fiscal year ending April 30, 1999. Mr. Sun's
employment agreement provides for his appointment as President of the Company
for a one year term, which ends on April 30, 1999. The term is automatically
extended for additional one (1) year periods unless either party gives written
notice to the other of its desire not to renew such term which notice must be
given no later than ninety (90) days prior to the end of each term on any such
renewal. The agreement provides that Mr. Sun received an annual base salary at
the rate of $75,000. The agreement provides that the Company reserves the right
to adjust Mr. Sun's salary during the term of the agreement. To demonstrate his
commitment to the Company during the fiscal year ended April 30, 1997, Mr. Sun
reduced his base salary approximately 44.47% from $120,000 to $66,635.
In the event that the Company terminates Mr. Sun's employment, other than
for cause, or Mr. Sun terminates his employment as a result of a breach by the
Company of the agreement, Mr. Sun will be paid severance compensation equal to
his annual base salary (at the rate payable at the time of such termination)
and accrued benefits plus an amount equal to the lesser of one year's full base
salary (as in effect at the time of such termination) and any other amounts
owed to him under the agreement or the full base (as in effect at the time of
such termination) and any other amounts that would have been payable to Mr. Sun
from the date of termination
III-3
through the original stated expiration date of the employment agreement. In the
event that the Company terminates Mr. Sun's employment for cause or Mr. Sun
shall terminate his employment for reasons other than a breach of the agreement
by the Company, the Company shall pay Mr. Sun his full base salary and accrued
benefits through the date of termination at the rate in effect at the time
notice of termination is given. For a period of two years following termination
of Mr. Sun's employment for any reason (other than a termination by the Company
without cause) Mr. Sun cannot perform services for or have an equity interest
in (except for an interest of 2% of less in an entity which is engaged in a
competitive business and which is publicly traded) any competitive business. In
addition, the Agreement provides that for the two year period following
termination of Mr. Sun's employment for any reason, with or without cause, Mr.
Sun cannot, directly or indirectly (including without limitation, as owner
employee, agent consultant or independent contractor) provide or solicit
services of the type provided by the Company to any of its existing customers
or potential customers with which or with whom the Company has negotiated
within the twelve months preceding the date of termination of Mr. Sun's
employment.
Angelo Crimi
On April 24, 1998 the Company entered into a new employment agreement with
Angelo Crimi for the fiscal year ending April 30, 1999. Mr. Crimi's employment
agreement provides for his appointment as Secretary of the Company for a one
year term, which ends on April 30, 1999. The term is automatically extended for
additional one (1) year periods until Mr. Crimi's death, unless either party
gives written notice to the other of its desire not to renew such term which
notice must be given no later than ninety (90) days prior to the end of each
term on any such renewal. The agreement provides that Mr. Crimi receive an
annual base salary at the rate of $75,000. The agreement further provides that
the Company reserves the right to adjust Mr. Crimi's salary during the term of
the agreement. To demonstrate his commitment to the Company during fiscal year
ended April 30, 1997, Mr. Crimi reduced his base salary approximately 32.35%
from $100,000 to $67,654.
In the event that the Company terminates Mr. Crimi's employment, other
than for cause, or Mr. Crimi terminates his employment as a result of a breach
by the Company of the agreement, Mr. Crimi will be paid severance compensation
equal to his annual base salary (at the rate payable at the time of such
termination) and accrued benefits plus an amount equal to the lesser of one
year's full base salary (as in effect at the time of such termination) and any
other amounts owed to him under the agreement or the full base (as in effect at
the time of such termination) and any other amounts that would have been
payable to Mr. Crimi from the date of termination through the original stated
expiration date of the employment agreement. In the event that the Company
terminates Mr. Crimi's employment for cause or Mr. Crimi shall terminate his
employment for reasons other than a breach of the agreement by the Company, the
Company shall pay Mr. Crimi his full base salary and accrued benefits through
the date of termination at the rate in effect at the time notice of termination
is given. For a period of two years following termination of Mr. Crimi's
employment for any reason (other than a termination by the Company without
cause) Mr. Crimi cannot perform services for or have an equity interest in
(except for an interest of 2% of less in an entity which is engaged in a
competitive business and which is publicly traded) any competitive business. In
addition, the Agreement provides that for the two year period following
termination of Mr. Crimi's employment for any reason, with or without cause,
Mr. Crimi cannot, directly or indirectly (including without limitation, as
owner employee, agent consultant or independent contractor) provide or solicit
services of the type provided by the Company to any of its existing customers
or potential customers with which or with whom the Company has negotiated
within the twelve months preceding the date of termination of Mr. Crimi's
employment.
Item 12. Security Ownership of Management and Certain Beneficial Owners (1)
The following table sets forth certain information, as of December 4,
1998, regarding the beneficial ownership of the Company's Common Stock by: (i)
each shareholder known by the Company to be the beneficial owner of more than
five percent of the outstanding shares of the Company's Common Stock; (ii) each
Director of the Company and nominees for director; (iii) each Named Executive
Officer (as hereinafter defined) of the Company; and (iv) all Directors,
nominees and executive officers of the Company as a group.
III-4
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Owner (2) (3) Class (2) (3)
------------------------------------ ------------------------ -------------
Salvatore Crimi Family Limited Partnership ......... 1,631,696 12.55
c/o Salex Holding Corporation
50 Laser Court
Hauppauge, New York 11788
Meadows Management, LLC ............................ 1,250,000(4)(5) 8.77
1500 Hempstead Turnpike
East Meadow, New York 11554
Dr. Robert Cohen ................................... 1,250,000(4)(5)(6) 8.77
1500 Hempstead Turnpike
East Meadow, New York 11554
Dr. Alan Cohen ..................................... 1,250,000(4)(5)(7) 8.77
1500 Hempstead Turnpike
East Meadow, New York 11554
Guardian Angel Management, Ltd. .................... 1,250,000(4)(5)(8) 8.77
147 Redpoll Circle
North Hills, New York 11577
Jonathan Pratt ..................................... 1,250,000(4)(5)(9) 8.77
147 Redpoll Circle
North Hills, New York 11577
Pershing Sun ....................................... 1,299,449(10) 9.98
c/o Salex Holding Corporation
50 Laser Court
Hauppauge, New York 11788
Salvatore Crimi .................................... 1,091,483(11) 8.38
c/o Salex Holding Corporation
50 Laser Court
Hauppauge, New York 11788
Franklin Pinter .................................... 125,000(12) *
Francis Fitzpatrick ................................ 54,516(13) *
Angelo Crimi ....................................... -- --
Syd Mandelbaum ..................................... -- --
All directors, and executive officers as a group (6
persons) .......................................... 2,570,448 15.93
- ------------
* Less than one percent (1%)
(1) These tables are based upon information supplied by Schedules 13D and 13G,
if any, filed with the Securities and Exchange Commission (the "SEC").
Unless otherwise indicated in the footnotes to the table and subject to
the community property laws where applicable, each of the shareholders
named in this table has sole voting and investment power with respect to
the shares shown as beneficially owned by him. Applicable percentage of
ownership is based on 13,004,770 shares of Common Stock, which were
outstanding on December 4, 1998.
(2) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage of ownership of that person, shares of Common Stock subject to
options or preferred stock held by that person that are currently
exercisable or convertible
III-5
within 60 days of December 4, 1998 are deemed outstanding. To the Company's
knowledge, except as set forth in the footnotes to this table and subject
to applicable community property laws, each person named in the table has
sole voting and investment power with respect to the shares set forth
opposite such person's name.
(3) In calculating the percent of the outstanding shares of Common Stock, all
shares issuable on exercise of stock options or conversion of preferred
stock held by the particular beneficial owner that are included in the
column to the left of this column are deemed to be outstanding.
(4) Represents shares of Common Stock to be acquired upon the conversion of
12,500 shares of Series C Preferred Stock.
(5) At the annual meeting of shareholders, Meadows Management, LLC ("Meadows"),
of which Dr. Robert Cohen and Dr. Alan Cohen are managing members, and
Guardian Angel Management, LTD ("Guardian Angel"), of which Jonathan Pratt
is the sole shareholder, intend to vote together on all matters presented
as such meeting. In the aggregate this group beneficially owns 2,500,000
shares.
(6) This amount includes all of the shares beneficially owned by Meadows. Dr.
Robert Cohen, a managing member of Meadows, has shared voting power and
shared investment power. Dr. Robert Cohen disclaims beneficial ownership of
such shares.
(7) This amount includes all of the shares beneficially owned by Meadows. Dr.
Alan Cohen, a managing member of Meadows, has shared voting power and
shared investment power. Dr. Alan Cohen disclaims beneficial ownership of
such shares.
(8) The Company intends to challenge the validity of the transfer of 12,500
shares of Series C Preferred Stock from Meadows to Guardian Angel of which
Jonathan Pratt is the sole shareholder
(9) This amount includes all of the shares beneficially owned by Guardian
Angel. Jonathan Pratt disclaims beneficial ownership of such shares.
(10) Includes 15,190 shares which may be acquired upon the exercise options
which will be exercisable within 60 days. Does not include 22,706 shares
underlying options with are not exercisable within 60 days.
(11) Includes 31,844 shares which may be acquired upon exercise of options
which will be exercisable within 60 days. Does not include 47,766 shares
underlying option with are not exercisable within 60 days
(12) Includes warrants to purchase 25,000 shares of Common Stock.
(13) Includes 956 shares which may be acquired upon the exercise of options
which will be exercisable within 60 days. Does not include 1,435 shares
underlying options which are not exercisable within 60 days.
III-6
Item 13. Certain Relationships and Related Transactions
On November 12, 1998, the Registrant and Betty Sun agreed to enter into a
new consulting agreement whereby Betty Sun shall serve as a consultant to the
Registrant for a term of one year (which term is deemed to have commenced on
June 20, 1998). Ms. Sun shall be compensated for her services at the annual
rate of $75,000, payable in biweekly installments, except that the portion of
Ms. Sun's compensation which relates to the services rendered by Ms. Sun from
June 20, 1998 to the date of the Cancellation Agreement is payable to Ms. Sun
in a single cash payment.
On September 18, 1996, the Company retired 1,453,600 shares of Common
Stock purchased by the Company from Mr. Crimi for a purchase price of
$2,000,000. As payment for this obligation, the Company and Mr. Crimi agreed to
offset the amount owed Mr. Crimi against certain loans made by the Company to
Mr. Crimi totaling $1,004,212. In addition, the Company assumed a note payable
(the "Note") by Mr. Crimi to a former shareholder of the Company in the amount
of $995,788. The Note bears interest at the rate of 10.5% per annum. Payments
of $55,086 (representing principal plus accured interest) are payable on a
quarterly basis. Mr. Crimi is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. As of January 4, 1999, the outstanding amount
owed under the Note is $561,591.
Sale of Registrant's Executive Offices
On December 23, 1998, the Registrant entered into a real estate purchase
agreement ("Purchase Agreement") by and among the Registrant, Salvatore Crimi
and Sun Associates, LLC ("Sun Associates"), a limited liability company
controlled by Betty Sun, (as record title holder) who is the wife of Perishing
Sun a director of the Registrant. Pursuant to the terms of the Purchase
Agreement, the Registrant and Salvatore Crimi agreed to sell to Sun Associates
certain property located in Hauppauge New York which is improved with the
Registrant's executive offices containing approximately 12,000 square feet of
space and a surface parking lot (the "Property"). The purchase price for the
Property was $1,100,000. Mr. Crimi was not personally entitled to any portion
of the proceeds for the sale of the Property and was only involved in the
transaction to the extent that certain title issues required his involvement.
Of the proceeds received by the Registrant $782,325.74 was used to pay the
mortgage securing the Property. The balance of the proceeds was used for
working capital by the Registrant. Simultaneously with the sale of the
Property, the Registrant and Sun Associates entered into a lease agreement (the
"Lease Agreement") pursuant to which Sun Associates leased the property to the
Registrant. Under the lease agreement, the annual basic rent for the Property
during the period commencing December 31, 1998 and ending on December 31, 1999
is $168,000. Such annual basic rent increases, by an amount not greater than
$8,985 during each year of the term of the Lease Agreement. As part of the
Lease Agreement, the Registrant and Sun Associates entered into a repurchase
option agreement (the "Option Agreement") which provides that the Registrant
may repurchase the property at any time prior to June 23, 1999 at a purchase
price of $1,155,000, net of Sun Associates' transaction costs, provided that
the Registrant is not in default under the Lease Agreement. The Lease Agreement
further provides that if Sun Associates sells the Property prior to the
December 31, 1999 then 50% of the profits resulting from the sale will be paid
to the Registrant provided that the Registrant is not in default under the
Lease Agreement.
Item 14. Exhibits and Reports on Form 8-K
Exhibits
- --------
Exhibit 3.1 Registrant's Certificate of Incorporation as amended to date -- incorporated by
reference to Exhibit 3 (a) to the Registrant's Registration Statement on Form
SB-2, File No. 33-75162.
Exhibit 3.2* Amendment to Registrant Certificate of Incorporation -- increasing the total
number of shares of authorized capital stock of the Registrant.
Exhibit 3.3* Amendment to Registrant's Certificate of Incorporation changing the name of
Registrant to Salex Holding Corporation.
Exhibit 3.4 Certificate and Agreement and Plan of Merger -- incorporated by reference to
Exhibit 3 (b) to Registrant's Registration Statement on Form SB-2, File No.
33-75162.
III-7
Exhibit 3.5 Registrant's Bylaws -- incorporated by reference to Exhibit 3 (c) to the Registrant's
Registration Statement on Form SB-2, File No. 33-75162.
Exhibit 4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to
the Registrant's Form 10-K filed on November 26, 1997.
Exhibit 4.2 Certificate of Designation of the Registrant's Series A Preferred Stock. Incorporated
by reference to Exhibit 4.2 to the Registrant's Form 10-K filed on November 26,
1997.
Exhibit 4.3 Certificate of Designation of the Registrant's Series B Preferred Stock. Incorporated
by reference to Exhibit 4.3 to the Registrant's Form 10-K filed on November 26,
1997.
Exhibit 4.4 Certificate of Designation of the Registrant's Series C Preferred Stock --
Incorporated by reference to Exhibit 4 to the Registrant's 8-K filed on June 17,
1997.
Exhibit 10.1 Amended and Restated Merger Agreement, dated as of September l9, 1996, by and
among the company, the Subsidiary, Salex, the Salex Subsidiaries, the Salex
Stockholders, Thomas M. Swartwood and T. Marshall Swartwood, Incorporated by
reference to Exhibit 10.1 to the Registrant's report on Form 8-K filed on September
19, 1996.
Exhibit 10.2 List of Omitted Schedules/Exhibits to Merger Agreement. Incorporated by reference
to Exhibit 10.2 to the Registrant's report from Form 8-K filed on September 19,
1996.
Exhibit 10.3 Promissory note issued by the Company to Crimi for $1,055,562.19 dated
September 18, 1996. Incorporated by reference to Exhibit 10.3 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.4 Promissory Note issued by the Company to Crimi for $944,437.81 dated September
18, 1996. Incorporated by reference to Exhibit 10.4 to the Registrant's report on
Form 8-K filed on September 19, 1996.
Exhibit 10.5 Amendment to Promissory Notes dated September 18, 1996. Incorporated by
reference to Exhibit 10.5 to the Registrant's report on Form 8-K filed on September
19, 1996.
Exhibit 10.6 Stock and Asset Purchase Agreement between the Company and Dickinson dated
September 18, 1996. Incorporated by reference to Exhibit 10.6 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.7 Indemnification Agreement between the Company and Dickinson dated September
18, 1996. Incorporated by reference to Exhibit 10.7 to the Registrant's report on
Form 8-K filed on September 19, 1996.
Exhibit 10.8 Tax Indemnity Agreement among the Company, Dickinson, and Dickinson & Co.,
Inc. dated September 18, 1996. Incorporated by reference to Exhibit 10.8 to the
Registrant's report on form 8-K filed on September 19, 1996.
Exhibit 10.9 The Divestiture Promissory Note issued by Dickinson to the Company dated
September 18, 1996. Incorporated by reference to Exhibit 10.9 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.10 Stock Pledge and Security Agreement between the Company and Dickinson dated
September 18, 1996. Incorporated by reference to Exhibit 10.10 to the Registrant's
report on Form 8-K filed on September 19, 1996.
III-8
Exhibit 10.11 Stock Option Agreement between Crimi and the Company dated September 18,
1996. Incorporated by reference to Exhibit 10.11 to the Registrant's report on Form
8-K filed on September 19, 1996.
Exhibit 10.12 Stock Option Agreement among Salex Stockholders and the Company dated
September 18, 1996. Incorporated by reference to Exhibit 10.12 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.13 Form of Registration Rights Agreement among each of the Salex Stockholders and
the Company dated September 18, 1996. Incorporated by reference to Exhibit 10.13
to the Registrant's report on Form 8-K filed on September 19, 1996.
Exhibit 10.14 Assumption by the Company of Salex's Mortgage dated September 18, 1996.
Incorporated by reference to Exhibit 10.14 to the Registrant's report on Form 8-K
filed on September 19, 1996.
Exhibit 10.15 Assumption of the Company of Salex's Employment Agreement with Crimi.
Incorporated by reference to Exhibit 10.15 to the Registrant's report on Form 8-K
filed on September 19, 1996.
Exhibit 10.16 Assumption of the Company of Salex's Employment Agreement with Pershing Sun.
Incorporated by reference to Exhibit 10.16 to the Registrant's report on Form 8-K
filed on September 19, 1996.
Exhibit 10.17 Form of Subscription Agreement dated as of June 2, 1997, between Registrant and
Meadows Management LLC. Incorporated by reference to Exhibit 2 to the
Registrant's report on Form 8-K filed on June 17, 1997.
Exhibit 10.18 Form of Registration Rights Agreement between Registrant and Meadows
Management LLC dated as of June 2, 1997. Incorporated by Reference to Exhibit 3
to the Registrant's Form 8-K filed on June 17, 1997.
Exhibit 10.19* Cancellation Agreement dated as of October 26, 1998 by and among Pershing Sun,
Betty Sun, Hillcrest Holdings, LLC, Salvatore Crimi and Angelo Crimi.
Incorporated by Reference to Exhibit 99.1 to the Registrant's Form 8-K filed on
November 18, 1998.
Exhibit 10.20* Real Estate Purchase Agreement dated as of December 23, 1998 by and among the
Registrant, Salvatore Crimi, and Sun Associates, LLC.
Exhibit 10.21* Lease Agreement dated as of December 23, 1998 by and among the Registrant and
Sun Associates, LLC.
Exhibit 11 Statement re computation of per share earnings.
Exhibit 27* Financial data schedule.
- ------------
*Filed herewith
(b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the
fourth quarter of fiscal year ended April 30, 1998.
III-9
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 of the undersigned thereunto duly authorized.
SALEX HOLDING CORPORATION
/s/ Salvatore Crimi
---------------------------------------
Salvatore Crimi
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Salvatore Crimi Chairman of the Board of Directors and Chief January 7, 1999
----------------------- Executive Officer
Salvatore Crimi
/s/ Pershing Sun President and Director January 7, 1999
-----------------------
Pershing Sun
/s/Angelo Crimi Secretary and Director January 7, 1999
-----------------------
Angelo Crimi
/s/ Franklin Pinter Director January 7, 1999
-----------------------
Franklin Pinter
/s/ Francis Fitzpatrick Director January 7, 1999
-----------------------
Francis Fitzpatrick
/s/ Syd Mandelbaum Director January 7, 1999
-----------------------
Syd Mandelbaum
III-10
EXHIBIT INDEX
Exhibit No. Description Page
- ------------ ----------- ----
Exhibit 3.1 Registrant's Certificate of Incorporation as amended to date -- incorporated by
reference to Exhibit 3 (a) to the Registrant's Registration Statement on Form
SB-2, File No. 33-75162.
Exhibit 3.2* Amendment to Registrant Certificate of Incorporation -- increasing the total
number of shares of authorized capital stock of the Registrant.
Exhibit 3.3* Amendment to Registrant's Certificate of Incorporation changing the name of
Registrant to Salex Holding Corporation.
Exhibit 3.4 Certificate and Agreement and Plan of Merger -- incorporated by reference to
Exhibit 3 (b) to Registrant's Registration Statement on Form SB-2, File No.
33-75162.
Exhibit 3.5 Registrant's Bylaws -- incorporated by reference to Exhibit 3 (c) to the Registrant's
Registration Statement on Form SB-2, File No. 33-75162.
Exhibit 4.1 Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to
the Registrant's Form 10-K filed on November 26, 1997.
Exhibit 4.2 Certificate of Designation of the Registrant's Series A Preferred Stock. Incorporated
by reference to Exhibit 4.2 to the Registrant's Form 10-K filed on November 26,
1997.
Exhibit 4.3 Certificate of Designation of the Registrant's Series B Preferred Stock. Incorporated
by reference to Exhibit 4.3 to the Registrant's Form 10-K filed on November 26,
1997.
Exhibit 4.4 Certificate of Designation of the Registrant's Series C Preferred Stock --
Incorporated by reference to Exhibit 4 to the Registrant's 8-K filed on June 17,
1997.
Exhibit 10.1 Amended and Restated Merger Agreement, dated as of September l9, 1996, by and
among the company, the Subsidiary, Salex, the Salex Subsidiaries, the Salex
Stockholders, Thomas M. Swartwood and T. Marshall Swartwood, Incorporated by
reference to Exhibit 10.1 to the Registrant's report on Form 8-K filed on September
19, 1996.
Exhibit 10.2 List of Omitted Schedules/Exhibits to Merger Agreement. Incorporated by reference
to Exhibit 10.2 to the Registrant's report from Form 8-K filed on September 19,
1996.
Exhibit 10.3 Promissory note issued by the Company to Crimi for $1,055,562.19 dated
September 18, 1996. Incorporated by reference to Exhibit 10.3 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.4 Promissory Note issued by the Company to Crimi for $944,437.81 dated September
18, 1996. Incorporated by reference to Exhibit 10.4 to the Registrant's report on
Form 8-K filed on September 19, 1996.
Exhibit 10.5 Amendment to Promissory Notes dated September 18, 1996. Incorporated by
reference to Exhibit 10.5 to the Registrant's report on Form 8-K filed on September
19, 1996.
Exhibit 10.6 Stock and Asset Purchase Agreement between the Company and Dickinson dated
September 18, 1996. Incorporated by reference to Exhibit 10.6 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.7 Indemnification Agreement between the Company and Dickinson dated September
18, 1996. Incorporated by reference to Exhibit 10.7 to the Registrant's report on
Form 8-K filed on September 19, 1996.
Exhibit 10.8 Tax Indemnity Agreement among the Company, Dickinson, and Dickinson & Co.,
Inc. dated September 18, 1996. Incorporated by reference to Exhibit 10.8 to the
Registrant's report on form 8-K filed on September 19, 1996.
Exhibit 10.9 The Divestiture Promissory Note issued by Dickinson to the Company dated
September 18, 1996. Incorporated by reference to Exhibit 10.9 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.10 Stock Pledge and Security Agreement between the Company and Dickinson dated
September 18, 1996. Incorporated by reference to Exhibit 10.10 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.11 Stock Option Agreement between Crimi and the Company dated September 18,
1996. Incorporated by reference to Exhibit 10.11 to the Registrant's report on Form
8-K filed on September 19, 1996.
Exhibit No. Description Page
- ------------ ----------- ----
Exhibit 10.12 Stock Option Agreement among Salex Stockholders and the Company dated
September 18, 1996. Incorporated by reference to Exhibit 10.12 to the Registrant's
report on Form 8-K filed on September 19, 1996.
Exhibit 10.13 Form of Registration Rights Agreement among each of the Salex Stockholders and
the Company dated September 18, 1996. Incorporated by reference to Exhibit 10.13
to the Registrant's report on Form 8-K filed on September 19, 1996.
Exhibit 10.14 Assumption by the Company of Salex's Mortgage dated September 18, 1996.
Incorporated by reference to Exhibit 10.14 to the Registrant's report on Form 8-K
filed on September 19, 1996.
Exhibit 10.15 Assumption of the Company of Salex's Employment Agreement with Crimi.
Incorporated by reference to Exhibit 10.15 to the Registrant's report on Form 8-K
filed on September 19, 1996.
Exhibit 10.16 Assumption of the Company of Salex's Employment Agreement with Pershing Sun.
Incorporated by reference to Exhibit 10.16 to the Registrant's report on Form 8-K
filed on September 19, 1996.
Exhibit 10.17 Form of Subscription Agreement dated as of June 2, 1997, between Registrant and
Meadows Management LLC. Incorporated by reference to Exhibit 2 to the
Registrant's report on Form 8-K filed on June 17, 1997.
Exhibit 10.18 Form of Registration Rights Agreement between Registrant and Meadows
Management LLC dated as of June 2, 1997. Incorporated by Reference to Exhibit 3
to the Registrant's Form 8-K filed on June 17, 1997.
Exhibit 10.19* Cancellation Agreement dated as of October 26, 1998 by and among Pershing Sun,
Betty Sun, Hillcrest Holdings, LLC, Salvatore Crimi and Angelo Crimi.
Incorporated by Reference to Exhibit 99.1 to the Registrant's Form 8-K filed on
November 18, 1998.
Exhibit 10.20* Real Estate Purchase Agreement dated as of December 23, 1998 by and among the
Registrant, Salvatore Crimi, and Sun Associates, LLC.
Exhibit 10.21* Lease Agreement dated as of December 23, 1998 by and among the Registrant and
Sun Associates, LLC.
Exhibit 11 Statement re computation of per share earnings.
Exhibit 27* Financial data schedule.
- ------------
*Filed herewith