U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
|X| Annual Report Pursuant to Section 13 or 15(d) of Securities Exchange
Act of 1934
For the fiscal year ended DECEMBER 31, 2005
|_| Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______.
COMMISSION FILE NO. 000-28321
UNITED COMPANIES CORPORATION
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0374969
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
940 N.W. 1ST STREET, FORT LAUDERDALE, FLORIDA 33311
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(Address of Principal Executive Offices) Zip Code)
(954) 462-5570
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(Issuer's Telephone Number, Including Area Code)
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AVID SPORTSWEAR & GOLF CORP.
(Former Name)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in the definitive proxy or information statement incorporated by reference in Part III of this Form 10-KSB or amendment to Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The Company's revenues during its most recent fiscal year were $2,935,869.
The aggregate market value of the Company's voting stock held by non-affiliates as of March 15, 2006 was approximately $480,339 based on the average closing bid and asked prices of such stock on that date as quoted on the Over-the-Counter Bulletin Board. There were 148,970,677 shares of common stock outstanding as of March 15, 2006.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Information included or incorporated by reference in this filing may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.
This filing contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our Company's growth strategies, (c) our Company's future financing plans and
(d) our Company's anticipated needs for working capital. These statements may be
found under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus generally.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this filing generally. In light of these risks and uncertainties, there can be
no assurance that the forward-looking statements contained in this filing will
in fact occur.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
United Companies Corporation (referred to herein as "United" or "The Company"), a Nevada corporation, entered into a Share Exchange Agreement, dated March 23, 2004, by and among United, Trebor Industries, Inc., d/b/a Brownie's Third Lung, a Florida corporation (referred to herein as "Trebor"), and Robert Carmichael. Pursuant to the Share Exchange Agreement, Mr. Carmichael exchanged 377 shares of common stock, par value $1.00 per share, of Trebor, which constitutes all of the issued and outstanding shares of capital stock of Trebor, for 95,000,000 shares of common stock, par value $0.001 per share, of United. Pursuant to the Share Exchange Agreement, Trebor became a wholly owned subsidiary of United.
The Company designs, tests, manufactures and distributes recreational
hookah diving, and yacht based SCUBA air compressor and Nitrox Generation
Systems, and scuba and water safety products through its wholly owned subsidiary
Trebor. United sells its products both on a wholesale and retail basis, and does
so from its headquarters and manufacturing facility in Fort Lauderdale, Florida.
The Company does businees as (dba) as Brownie's Thrid Lung, the dba of Trebor.
The Company's products are classified into three main sales categories:
BROWNIE'S THIRD LUNG, BROWNIE'S TANKFILL, AND BROWNIE'S PUBLIC SAFETY.
BROWNIE'S THIRD LUNG, the consistent product category revenue leader for the Company, is comprised of Surface Supplied Diving products, commonly called hookah systems. These systems allow one to four divers to enjoy the marine environment without the bulk and weight of conventional SCUBA gear. We believe that Hookah diving holds greater appeal to families with children of diving age than does conventional SCUBA. The reduction of weight by eliminating the tank allows smaller divers, especially children, to participate more actively and enjoyably. In conjunction with the hookah systems, Brownie's Third Lung supplies a variety of other products to support this market. These products are predominantly sold through SCUBA diving retailers, however, Brownie's is expanding its market to sporting goods and boating retailers as well largely through a web-based training methodology that was introduced in July 2005. Web-based training allows consumers to initiate the required training for use of the system on their own schedule. It also addresses the training aspect that was previously a sale consideration at point-of-sale. Effective July 1, 2005, all hookah units sold include on-line training certificates. The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder. The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates). It is anticipated that the final phase of the training will still be completed through traditional dive retailers and instructors, but the system can now be sold to the non-diving public. Also, being investigated is the addition of boating and watersports products not strictly related to diving to this product category.
The BROWNIE'S TANKFILL product category also generates a significant portion of the Company's revenues, through the design, installation and maintenance of yacht-based high-pressure and low-pressure compressors for diving on air and mixed gases. Many yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or custom mixed gases while out on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in various ports-of-call. Brownie's Tankfill specializes in the design and installation of high-end custom systems to do just that. From surveying the vessel for installation requirements to custom fabrication of the necessary components, Brownie's Tankfill provides all the services necessary to satisfy this market. Brownie's Tankfill is currently exploring relationships with yacht builders to allow shipyards to market and sell the Brownie's Tankfill systems. We believe that every large vessel currently in service, being re-fitted or built, is a potential customer. Reaching these customers through OEM relationships has become our goal, and efforts toward this end are proving successful. We currently have three such OEM relationships in place, an additional two in the negotiation stage, and will work toward more through direct contact with the yacht-builders.
The BROWNIE'S PUBLIC SAFETY product line provides integrated and stand-alone flotation and emergency/rescue equipment for use by fire departments and other government agencies in their on-water/near-water activities. "Rescue, not Recovery" is the marketing slogan for this division, and the driving force behind development of our products. We believe municipalities and government agencies can increase their own safety while responding more quickly in emergencies through the use of our products. BROWNIE'S PUBLIC SAFETY is not only our newest product line, but also one we believe has significant growth potential. We are increasing our marketing efforts in the current year to raise awareness of the products we offer. In July 2005, we entered into an agreement establishing Global Secure Safety Products, Inc. as our exclusive North and South American distributor for the Rapid Entry System (RES) mini scuba product, which is being sold exclusively in these markets under the Global Secure band ad the Global Secure Rescue Pac. Largely as a result of this agreement, sales in the BROWNIE'S PUBLIC SAFETY product category more than doubled from 2004 to 2005. We continue to pursue similar distributorships outside this market area as well.
Since April 16, 2004, Mr. Robert Carmichael has served as President, Acting Principal Accounting Officer and Acting Chief Financial Officer of United. From March 23, 2004 to April 26, 2004, Mr. Carmichael served as United's Executive Vice-President and Chief Operating Officer. Mr. Carmichael has operated Trebor Industries, Inc. as its President since 1986. Mr. Carmichael is either the owner or co-owner of several companies that hold numerous patents that are used by Trebor Industries, Inc. and several other major companies in the diving industry. Prior to the share exchange transaction with Trebor, United had no on-going operations. United had been seeking potential operating businesses and business opportunities, with the intent to acquire or merge with such businesses.
On February 12, 2002, United filed with the Securities and Exchange Commission a Form S-4 Proxy Statement and Registration Statement in conjunction with Avid Sportswear & Golf Corp., a Nevada corporation, describing a proposed merger of Avid with and into Merger Co., a wholly-owned subsidiary of United. On January 28, 2003, the Commission declared the Form S-4 Proxy Statement and Registration Statement effective. At a special meeting of Avid shareholders held on February 20, 2003, the shareholders approved (i) the Merger Agreement, dated June 18, 2002, by and among Avid, United and Merger Co. and (ii) the related Articles of Merger. Merger Co. became the surviving entity and assumed all of Avid's assets and liabilities. At the time of the merger, outstanding shares of Avid common stock were converted automatically into shares of United common stock on a fifty (50) for one (1) basis. In the opinion of Avid's management, the excess of Avid's liabilities over its assets and the lack of available funding made any other acquisition or merger, other than the merger with Merger Co., unlikely. Effective March 23, 2004, United sold all of its ownership interest in its wholly-owned subsidiary, Merger Co., to Gateway Connections Limited, an international business company formed under the laws of Belize.
OUR PRODUCTS AND SERVICES BY CATEGORY AND THEIR RELATED WEBSITES
BROWNIE'S THIRD LUNG (WWW.BROWNIEDIVE.COM) - Surface Supplied Air (SSA), Hookah, (Low Pressure Units) - recreational surface supplied air units (gas and electric), commercial surface supplied air units (gas and electric), Pressurized Snorkel (battery), Egressor packages and regulators, hookah hoses and regulators, Drop weight Cummerbelt, dive weight belts, SeaDoo Sea Scooters, Twin-trim, diving hose, diving kits, dive hose connections, replacement SS engines, compressors, miscellaneous service parts, SSA accessories including but not limited to gear bags, dog snares, and keel and trim weight packages.
BROWNIE'S TANKFILL (WWW.TANKFILL.COM) - Tankfill Systems (High And Low Pressure Units) - Yacht Pro automated compressors (heavy-duty service capacity), Yacht Pro automated compressors (medium-duty service capacity), marine basic compressors (light-duty service capacity), Bauer portable compressors (light-duty service capacity), custom tankfill and nitrox generation systems for yachts, NitroxMakers, four-way fill manifolds, remote fill control panels, high pressure storage/cascade systems, custom tank racks, Kaeser low pressure compressors and components, E-Reel diving systems, hookah diving compressor for boat installation, design and engineering services including but not limited to AutoCAD, nitrox generation and custom gas mixing systems, and repairs and service on all products sold.
BROWNIE'S PUBLIC SAFETY (WWW.BROWNIESPUBLICSAFETY.COM) - Public Safety Dive Gear and Accessories - SHERPA, HELO systems, Rapid Entry System (RES), Garment Integrated Personal Flotation Device (GI-PFD), Fast float system, Personal Life raft, Surf shuttle, lift bags, and various other safety related accessories.
CUSTOMERS
We are predominantly a wholesale distributor to retail dive stores, marine stores, and shipyards. This includes approximately 517 independent Brownie dealers. We retail our products to including, but not limited to, boat owners, recreational divers and commercial divers. Our largest customer and Brownie dealer is Brownie's Southport Diver's, Inc. (BSD), a related entity owned by the brother of Robert Carmichael, the Company's Chief Executive Officer. Sales to BSD for the years ended December 31, 2005 and 2004 represented, 18.3% and 21.7%, respectively, of total Company sales. No other single customer represented greater than 10% of net revenues for standard business of a re-occurring nature. While individual custom tankfill system sales may periodically represent a concentration of revenue, sales of this type are of a non-reoccurring nature.
RAW MATERIALS
Principal raw materials for our business include machined parts such as rods, pistons, bearings; hoses; regulators; compressors; engines; high-pressure valves and fittings; sewn goods; and various plastic parts including pans, covers, intake staffs, and quick release connections. Principal suppliers of these materials to us are Kuriyama, Advantage Plastics of New York, Gates Rubber, Ocean Divers Supply, Anderson Metals, East Coast Plastics, Mile Marker, Center Star, Bauer, Leeson Electric, Sagittarius, Campbell Hausfield, Roberts Supply, Robin America Subaru, and Florida Fluid Systems Technology Inc. Most materials are readily available from multiple vendors. Some materials require greater lead times than others. Accordingly, we strive to avoid out of stock situations through careful monitoring of these inventory lead times, and through avoiding single source vendors whenever possible.
COMPETITION
We consider the most significant competitive factors in our business to be low prices, shopping convenience, the variety of available of products, knowledgeable sales personnel, rapid and accurate fulfillment of orders, and prompt customer service. We currently recognize one significant competitor in hookah sales and two significant competitors in high pressure tankfill sales. Products from the hookah competitor and those from one of the tankfill competitors are very similar to ours as the principals in both received their training in the industry from Trebor. The Company's other competitor in high pressure tankfill is a large multi-national company that does not offer significant customization, thereby we believe reducing our head-to-head competition in many cases. We believe we do not have significant competitors in the Brownie's Tankfill line of high-end custom yacht packages.
Overall, we are operating in a moderately competitive environment. We believe that the price structure for all the products we distribute compares favorably with the majority of our competitors based on quality and available features. While certain of our competitors offer lower prices on some similar products, we believe that few can offer products and services which are comparable to those of ours in terms of convenience, available features, reliability, and quality. In addition, most of our competitors offer only high or low-pressure products and services where we are able to fulfill both needs.
PERSONNEL
We currently have fourteen (14) full time employees at our facility in Fort Lauderdale, Florida, seven (7) are classified as, administrative or management, and seven (7) are classified as non-exempt factory or administrative support. We utilize consultants when needed in the absence of available in-house expertise. Our employees are not covered by a collective bargaining agreement.
SEASONALITY
The current main product categories of our business, Brownie's Third Lung and Brownie's TankFill, are seasonal in nature. The peak season for Brownie's Third Lung's products is the second and third quarters of the year. The peak season for Brownie's TankFill's products is the fourth and first quarters of the year. Since the seasons compliment one another, we are able to shift cross-trained factory and warehouse personnel between the two product categories as needed. Thus, the Company is able to avoid down time normally associated with seasonal business.
SOME OF THE COMPANY'S PRODUCTS IN DEPTH
A. SURFACE SUPPLIED AIR SYSTEM: The Company produces a line of Surface Supplied Diving products, commonly called hookah systems. These systems allow one to four divers to enjoy the marine environment up to 90 feet without the bulk and weight of conventional SCUBA-gear. We believe that hookah diving holds greater appeal to families with children of diving age than does conventional SCUBA. The reduction of weight by eliminating the tank allows smaller divers, especially children, to participate more actively and enjoyably. The design of our product also reduces the effort required to both transport and use it. We believe the PELETON(TM) Hose System revolutionizes hose management for recreational surface supplied diving. It reduces the work required of any single diver by dispersing the load over the entire group. We use a single, larger diameter hose as a main downline with up to four individual hoses attached to it. This configuration not only reduces the weight and bulk of the hose required, but also reduces drag and entanglement. An entire line of deck-mounted systems is available for commercial applications that demand extremely high performance. In addition to the gasoline-powered units, a series of electric powered systems is also available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration, these units are used primarily by businesses that work in a marine environment.
B. E-REEL AND BUILT-IN BATTERY SYSTEMS: Taking convenience one step further, the Company has developed two surface supplied air products to make boat diving even easier. The Built-in Battery System builds a battery powered electric unit into the boat, eliminating the need to transport the compressor/motor assembly. The need for a flotation tube is also removed, as the boat itself serves in that capacity. The E-Reel advances this idea by adding a reel system to provide compact storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. The hose is manually pulled from the reel supporting up to two divers to a depth of fifty feet. When the dive is complete, the hose is automatically recoiled and stowed by the simple activation of a switch.
C. KAYAK DIVING HOSE KITS: This product allows the use of a conventional SCUBA cylinder, but does not require the diver to wear it. The cylinder remains above the surface, in a kayak or boat, and a hose ranging from 20 to 150 feet allow the diver to explore the surrounding area.
D. DROP WEIGHT CUMMERBELT: The patented Drop Weight Cummerbelt is available with all our diving systems, and brings a new dimension to weighting systems. The belt will accommodate waist sizes from 24 to 54 inches and is depth compensating. It features two pockets, each capable of holding up to 10 pounds of block or shot weight. Each pocket can be instantly release by either hand, allowing the diver to achieve positive buoyancy in an emergency while retaining the belt itself. Additionally, the design of this belt provides for expanded capability. By adding an optional sleeve that zips onto the back of the belt, an egress, or bailout system, can be added. The Egressor Add-on Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder, and a SCUBA regulator. In addition to the added safety inherent in this design, many other uses for this present themselves, such as propeller clearing, overboard item retrieval and pool maintenance, to name only a few.
E. BELL BOTTOM FLAG BAG (BBFB): Is what we believe to be a unique product providing the diver with a collection bag at depth, a marker (floating flag) at the surface and a lifting device independent of the diver as well as an ascent safety device. This product allows the diver to minimize the amount of gear needed for safety or the harvest of seafood.
F. BC KEEL COUNTERWEIGHT SYSTEM: Is what we believe to be a revolutionary ballast system designed to offset the inherent buoyancy of a SCUBA tank and provide the diver with a more reliable `face -up' surface position. According to statistics obtained from the Diver's Alert Network (DAN), more than half of the 100 average annual fatalities in the recreational dive industry occur at the surface, usually after another series of distressing events. Until now the dive industry has ignored the problem out of fear of assuming additional responsibility. However, all major dive equipment manufacturers support the disclaimer inside the divers vest that reads " this buoyancy compensator is not a life vest, do not rely upon it to keep your face out of the water in an unconscious event". With the approval (Sept. 1996) by the USCG for purely inflatable life vest, the disclaimer has quickly become unreliable as a method of litigious defense. Our tests show that most typical diver's vest will outperform the criteria required of the new USCG "TYPE III" PFD when properly ballasted. The product received the "Editor's Choice" award in the October 1997 issue of the industry's largest publication (Skin Diver). This is the first piece of significant exposure directed to the diving public. We believe the actual market size for this product is tremendous. Approximately 700,000 new divers are trained every year in this country alone according to the Professional Association of Dive Instructors (PADI). Our product has the technical and affordable potential to become the "primary ballast system" on the majority of those divers. We also believe the total 1.6 to 2.9 million active scuba divers, the number of active divers according to PADI, is also likely to be converted over the coming years as the trend is established. The other most formidable obstacle to success of this incredible invention is lack of exposure. Simple print and web advertising combined with significant sample placement in the hands of the educator of our industry can likely cure this most rapidly. The soft version of the BC KEEL allows the diver to choose between 1 and 8 pounds of fixed ballast securely fastened to the tank in such a position as to create maximum rotational efficiency with the absolute minimum of weight. There are four most popular items that almost ALL divers buy before the completion of Open Water I Certification: Mask, Snorkel, Fins, and Weight system, because these items are affordable, small, universal, and most importantly PERSONAL.
G. TANKFILL COMPRESSORS: Many yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or custom mixed gases while out on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in various ports-of-call. Brownie's Tankfill specializes in the design and installation of high-end custom systems to do just that. From surveying the vessel for installation requirements to custom fabrication of the necessary components, Tankfill provides all the services necessary to satisfy this market. Tankfill is currently exploring relationships with yacht builders to allow shipyards to market and sell the Brownie's Tankfill systems. We believe that every large vessel currently in service, being re-fitted or built, is a potential customer. Reaching those customers through OEM relationships has become our goal, and efforts will be made in the coming months to realize it. Our light duty compressor, the Marine Basic is specifically designed and built to withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht Pro series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty use as found on research vessels, commercial operations and live-aboard dive boats. All Yacht Pro models come with the Digital Frequency Drive, which is a Brownie's Tankfill innovation. The Digital Frequency Drive eliminates the spike previously experienced in starting the compressor, eliminating the need to ration the boat's electrical usage by shutting down components when the compressor is needed. Brownie's utilizes a AutoCAD industrial drawing program to design, engineer and maintain drawings of its various products. Custom design work is done in-house for major product installations and in conjunction with other entities.
H. NITROXMAKER(TM): We believe Nitrox has become the gas of choice for informed recreational diving the world over. What was once only available from land based gas mixing facilities is now easily accessible to the yacht diver. With a Brownie's NitroxMaker(TM), the user simply dials-in a desired oxygen level from 21% to 40%, eliminating the need to transport and handle pure oxygen. The resulting diving gas mix is monitored with digital oxygen analyzers, removing the calculations required to blend or mix the gas.
I. RAPID ENTRY SYSTEM (RES) AND HELO SYSTEM: The Brownie's Public Safety product category exists to address the needs of the public safety dive market. The inherent speed and ease of donning our Drop Weight Cummerbelt with Egressor Add-on Kit identified it as an obvious choice for rapid response for water-related emergencies. A first-responder or officer on-scene can initiate the location and extraction of victims while the dive team is en-route, saving valuable time and increasing the changes for survival of victims. The RES is a small SCUBA system that can be quickly donned over clothes, usually in less than sixty seconds. Its small size allows it to be stored in areas that would never accommodate a full set of SCUBA gear. The 13 cubic foot aluminum tank can provide up to 15 minutes of air at the surface. The air cell remains stowed under the protective cover and can be partially inflated to achieve positive flotation. The cover's specially designed break-away zipper bursts open to provide instant inflation yet "heals" and can be repacked and fastened quickly in the field. The HELO offers all the same features, but has been specially designed and modified for rescue divers working from helicopters. By placing the cylinder in the front and adding leg straps, the HELO allows divers to use the standard seating configurations. The advantages of this system over full sized SCUBA rigs are increased mobility for the diver and diminished space requirements for the gear. Since the bottle is mounted at the diver's waist, he can more easily control his gear during deployment, further adding to the comfort and safety.
MARKET DATA
The Company operates in both the SCUBA Diving Industry and the Marine Industry. The following is general market data for both:
SCUBA DIVING INDUSTRY
The following data is based on information reported on Professional Association of Dive Instructor's (PADI) website, www.padi.com, as of March 15, 2006: PADI certifies 60% of all new divers in the United States. PADI issued 526,904 new divers certifications worldwide in 2000 (the most recent information available). (Thus, per our extrapolation, an estimated 878,173 new divers were certified by all the training agencies collectively worldwide in 2000). PADI estimates that the range of active divers in the United States ranges from 1.6 million to 2.9 million based on data it collected. Per PADI, the largest number of SCUBA certifications completed each year in the United States has been in Florida. Also, per PADI's statistics, the number of certifications issued by PADI each year has increased consistently since 1967.
MARINE INDUSTRY
The following data is based on information provided on the website of the National Marine Manufacturers Association (NMMA), www.nmma.org, as of March 15, 2006: As of 2004 it was estimated that there were a total of 17.61 million boats in use in the United States. Recreational boating contributed approximately $33 billion to the nation's economy, up more than 8% from 2003. Sales growth of recreational boats continued to outpace U.S. economic growth in 2004, increasing an average of 8% annually since 1997, when compared to the Gross Domestic Product, which averaged 3.4% annual growth during the same period. Of the boats in use during 2003, 12.79 million were registered. Of this amount, Florida captured the number three ranking with 939,968 registrations among all the states. Total dollars spent on new power boats, motor, trailers and accessory purchases in 2004 was $15.40 billion with Florida ranking number one among all the states capturing $2.11 billion of this market. Total dollars spent on marine aftermarket accessory purchases alone was $2.42 billion. Of this amount, again Florida ranked number one among all the states capturing $305 million of this market. The products the Company sells would generally be considered part of the marine aftermarket accessory category. From 2003 to 2004 the marine aftermarket accessory market has grown from $2.12 billion to $2.42 billion, or an increase of 14.15%. Over the past seven years aftermarket accessories sales have doubled from $1.2 billion in 1997 to $2.4 billion in 2004.
PRODUCT TARGET MARKETS
The Company sells a variety of products that fall primarily into three categories, Brownie's Third Lung, Brownie's Tankfill, and Brownie's Public Safety Diving. While all of our offerings are marine based, each product category targets a slightly different consumer and approaches its target group in a different manner. Due to the common water-based theme, some of the markets will overlap, thereby qualifying the same customer for more than one major product. Although the United States and predominantly Florida have been our market focus, we continue to search for and establish distributors in Australia and Europe for all of our products.
Brownie's Third Lung, the Surface Supplied Air or hookah product category has both retail and wholesale groups. We believe that a significant portion of the 939,968 registered boat owners in Florida as reported by NMMA are potential customers for our recreational systems. In past years our product was more likely to reach them through SCUBA diving retailers. In mid 2005, in an effort to expand our Scuba diving retailer market and to reach additional, non-diving consumers, the Company implemented a web-based training program to expand the availability of our product to marine retailers who cater, for the most part, specifically to boaters.
Brownie's Tankfill targets a similar group, the boating community, but concentrates its attention on boats over 30 feet in length. We have enjoyed a measure of success by approaching the consumer directly. We have begun to reap reap greater benefits in this product category by establishing relationships with boat yards building luxury vessels throughout the world. To that end, we have established an OEM policy and pricing structure to offer to boat builders. As of the end of 2005 three boat builders had signed up for this program and we anticipate more will as we continue to approach them in 2006.
Our newest market is that for Brownie's Public Safety Diving. We have identified municipalities and government agencies, both in the United States and abroad, as our primary consumer. In July 2005, we entered into an agreement establishing Global Secure Safety Products, Inc. as our exclusive North and South American distributor for the Rapid Entry System (RES) mini scuba product, which is being sold exclusively in these markets under the Global Secure brand as the Global Secure Rescue Pac. The RES is part of our public safety sales product category.
TRADENAMES AND PATENTS
TRADENAMES
The Company has licensed from two entities in which the Chief Executive Officer has an ownership interest, the exclusive use of the following registered and unregistered tradenames, trademarks and service marks for the terms of their indefinite lives: Brownie's Third Lung, browniedive.com, Brownie's, Brownie's Third Lung oval symbol, browniedive, NitroxMaker, HELO, RES, fast float rescue harness, tankfill.com, browniestankfill, browniestankfill.com, browniespublicsafety.com, and browniespublicsafety, Peleton Hose System, Twin-Trim, Kayak Diving Hose Kit, Bell Bottom Flag Bag, and Brownie's Dogsnare.
The Company has licensed from an entity that the Chief Executive Officer has an ownership interest, the non-exclusive use of the following registered and unregistered trademarks, trade names, and service marks for the terms of their indefinite lives: SHERPA, BC keel, and Garment Integrated Personal Flotation Device (GI-PFD).
PATENTS
The Company has licensed from two entities that the Chief Executive Officer has an ownership interest, the non-exclusive use of the following issued and pending Patents for the terms of their respective lives ranging from 10 to 20 years:
ISSUED: Drop Weight Dive Belt (Drop Weight Cummerbelt), Combined Life Vest Buoyancy Compensator (BC/PFD and Separating Life Vest), Water Safety Survival System (Non-Releasable Tank Mounted Counterweight and Weight Ballasting Systems note: includes BC Keel), Separating Life Vest Multifunction Buoyancy Compensator (MC/PFD and Continuation in Part to the Water Safety Survival System), Garment Integrated Personal Flotation Device (GI-PFD), and Inflatable Dive Marker Collection Bag (Bell Bottom Flag Bag).
PENDING: Break Away Keel with Neutralizing Buoyancy Offset (Advanced BC Keel Design), and SHERPA.
MARKETING
PRINT LITERATURE, PUBLIC RELATIONS, AND ADVERTISING
We have in-house graphic design and public relations departments to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases. We also target specific markets by selectively advertising in journals and magazines that we believe reach our potential customers.
TRADESHOWS
In 2005 and 2004, the Company was represented at the following annual trade shows: Miami Yacht and Brokerage Show, Fort Lauderdale International Boat Show, and International Boat Exhibitors Exchange (IBEX).
WEBSITES
The Company has several web sites: www.browniedive.com, www.tankfill.com, and www.browniespublicsafety.com. Additionally, all our products are marketed on our primary customers' website. In addition, to these websites, numerous other websites have quick links to the Company's websites. Our products are available domestically and internationally. Internet sales and inquiries are on the rise as the newest preferred method of many customers, particularly International customers.
DISTRIBUTION
Our products are distributed to our customers primarily by common carrier.
EXPANSION GOAL
The Company has expanded in the past through internal growth. Should an opportunity arise in the future for a business acquisition that we believe will complement our business strategically or expand our market share, we will evaluate its feasibility at that time.
PRODUCT RESEARCH AND DEVELOPMENT (R&D)
We continuously work to provide our customers with both new and improved products. We offer research and development services to not only the related entities we license our patents and trademarks from, but also to other customers as well. R&D services for customers and the related entities are invoiced in the normal course of business. In addition, we are working on internal research and development projects toward the goal of developing some of our own patentable products. Research and development costs for the year ended December 31, 2005 and 2004, were $18,730 and $73,280, respectively.
GOVERNMENT REGULATIONS
The SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation. Nevertheless, the Company strives to be a leader in promoting safe diving practices within the industry and believes it is at the forefront of self-regulation through responsible diving practices. The Company is subject to all regulations applicable to "for profit" companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained. There can be no assurance that the Company's operation and profitability will not be subject to more restrictive regulation or increased taxation by federal, state, or local agencies in the future.
ITEM 2. DESCRIPTION OF PROPERTY
The corporate headquarters, factory and distribution center of the Company are located at 936/940 NW 1st Street, Ft. Lauderdale, FL 33311. The facility that is leased from an entity in which the Chief Executive Officer has an ownership interest contains approximately 16,000 square feet of space of which approximately 7,500 square feet is office, and the remainder is factory and warehouse space. The lease expires in April 2013 and has three 5-year renewal options. We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the Over-the-Counter Bulletin Board on March 24, 1998, under the symbol "GFIO." On July 22, 1999, Avid's symbol was changed to "AVSG." On December 2, 1999, Avid's common stock was no longer eligible for quotation on the Over-the-Counter Bulletin Board because the Securities and Exchange Commission as of that date had not declared the Company's Registration Statement on Form 10-SB effective. On that date, Avid's common stock began trading on the "pink sheets." Avid began trading again on the Over-the-Counter Bulletin Board, May 9, 2000. On May 28, 2003, Avid's common stock was no longer eligible for quotation on the Over-The-Counter Bulletin Board because the Company was not current in its required filings pursuant to the Securities Exchange Act of 1934, as amended. On January 2, 2004, United's symbol was changed to "UCPJ." On September 24, 2003, United's common stock began trading again on the Over-the-Counter Bulletin Board. The Company's high and low bid prices by quarter during 2005, 2004 and 2003 are as follows(1):
CALENDAR YEAR 2005(2)
-----------------------------
HIGH BID LOW BID
---------- ----------
First Quarter $ 0.023 $ 0.007
Second Quarter $ 0.014 $ 0.004
Third Quarter $ 0.010 $ 0.003
Fourth Quarter $ 0.007 $ 0.002
CALENDAR YEAR 2004(2)
-----------------------------
HIGH BID LOW BID
---------- ----------
First Quarter $ 0.1000 $ 0.0100
Second Quarter $ 0.1750 $ 0.0160
Third Quarter $ 0.0240 $ 0.0120
Fourth Quarter $ 0.0130 $ 0.0070
CALENDAR YEAR 2003(2)
-----------------------------
HIGH BID LOW BID
---------- ----------
First Quarter $ 0.0055 $ 0.0010
Second Quarter $ 0.0019 $ 0.0008
Third Quarter $ 0.0010 $ 0.0005
Fourth Quarter $ 0.0200 $ 0.0080
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(1) These quotations reflect high and low bid prices form the Over-the-Counter Bulletin Board and the "pink sheets."
(2) These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
On March 15, 2006, the closing price of our common stock as reported on the Over-the-Counter Bulletin Board was $0.0089 per share.
HOLDERS OF COMMON STOCK
As of March 15, 2006, we believe United had in excess of 250 shareholders of record.
DIVIDENDS
We have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the growth of the business. We cannot assure you that we will ever pay cash dividends. Whether we pay any cash dividends in the future will depend on the financial condition, results of operations and other factors that the Board of Directors will consider.
DESCRIPTION OF SECURITIES
COMMON STOCK
Our Articles of Incorporation authorize the issuance of 250,000,000 shares of common stock, $0.001 par value per share. As of March 15, 2006, 148,970,677 shares of common stock were issued and outstanding. The following description is a summary of the capital stock of United and contains the material terms of the capital stock. Additional information can be found in United's Articles of Incorporation and Bylaws.
Each holder of our common stock is entitled to one vote per share of common stock standing in such holder's name on our records on each matter submitted to a vote of our stockholders, except as otherwise required by law. Holders of our common stock do not have cumulative voting rights so that the holders of more than 50% of the combined shares of our common stock voting for the election of directors may elect all of the directors if they choose to do so and, in that event, the holders of the remaining shares of our common stock will not be able to elect any members to our board of directors. Holders of our common stock are entitled to equal dividends and distributions, per share, when, as and if declared by our board of directors from funds legally available. Holders of our common stock do not have preemptive rights to subscribe for any of our securities nor are any shares of our common stock redeemable or convertible into any of our other securities. If we liquidate, dissolve or wind up our business or affairs, our assets will be divided up pro-rata on a share-for-share basis among the holders of our common stock after creditors, if any, are paid.
SECURED CONVERTIBLE DEBENTURES
On April 2, 2004, we issued a Secured Convertible Debenture to Cornell
Capital Partners, LP in the principal amount of $250,000. The Secured
Convertible Debenture is convertible into shares of our common stock at a price
per share that is equal to the lesser of: (i) an amount equal to 120% of the
closing bid price of our common stock as of the date of the convertible
debenture or (ii) an amount equal to 80% of the average of the lowest daily
volume weighted average price of our common stock for the five trading days
immediately preceding the conversion date. The Secured Convertible Debenture
accrues interest at a rate of 5% per year and is convertible at the holder's
option. The Secured Convertible Debenture has a term of 2 years and is secured
by all the assets of United. At United's option, the Secured Convertible
Debenture may be paid in cash or converted into shares of our common stock
unless converted earlier by the holder. Except after an event of default as set
forth in the Secured Convertible Debenture, Cornell Capital Partners, LP is not
entitled to convert such debenture for a number of shares of common stock of
United in excess of that number of shares which, upon giving effect to the
debentures if such conversion would cause the aggregate number of shares of
common stock beneficially held by such holder and its affiliated to exceed 4.99%
of the outstanding shares of common stock of United. On July 23, 2004, United
issued a second Secured Convertible Debenture in the principal amount of
$125,000, with the same terms and conditions as the Secured Convertible
Debenture issued on April 2, 2004, as described above. United has the right to
redeem with fifteen (15) business days advance notice, a portion or all of the
outstanding convertible debentures. The redemption price shall be one hundred
twenty percent (120%) of the redeemed amount plus accrued interest. In addition,
if United avails itself of the redemption right, United shall, concurrent with
the redemption, issue warrants to the holder at a rate of 50,000 per $100,000
redeemed, pro-rata. The exercise price of the warrants shall be 120% of the
closing bid price of United's common stock on the closing date. The warrants
shall have "piggy-back" and demand registration rights and shall survive for two
(2) years from the closing date.
The following table represents conversions by Cornell Capital Partners, LP under the terms of the Secured Convertible Debenture as of the year ended December 31, 2005 for free-trading common stock:
Conversion Notice Date of Conversion $ Conversion $ Number
Date Conversion Amount Per Share price of Shares
--------------------------------------------------------------------------------
February 15, 2005 March 3, 2005 $ 10,000 $ 0.0128 781,250
March 8, 2005 March 24, 2005 10,000 $ 0.0082 1,219,512
June 21, 2005 July 15, 2005 10,000 $ 0.0028 3,571,429
August 3, 2005 September 13, 2005 10,000 $ 0.0025 4,000,000
September 19, 2005 September 19, 2005 10,000 $ 0.0046 2,173,913
October 19, 2005 October 19, 2005 10,000 $ 0.0026 3,773,585
November 14, 2005 November 14, 2005 10,000 $ 0.0023 4,347,826
December 7, 2005 December 7, 2005 5,390 $ 0.0018 2,994,444
-------- ----------
$ 75,390 22,861,959
======== ==========
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The following table represents conversions by Cornell Capital Partners, LP under the terms of the Secured Convertible Debenture subsequent to the year ended December 31, 2005 for restricted common stock:
Conversion Notice Date of Conversion $ Conversion $ Number
Date Conversion Amount Per Share price of Shares
--------------------------------------------------------------------------------
January 6, 2006 February 2, 2006 $ 10,000 $ 0.0016 6,250,000
February 10, 2006 March 7, 2006 10,000 $ 0.0032 3,125,000
March 1, 2006 March 7, 2006 10,000 $ 0.0032 3,125,000
-------- ----------
$ 30,000 12,500,000
======== ==========
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STANDBY EQUITY DISTRIBUTION AGREEMENT
On April 2, 2004, we entered into a Standby Equity Distribution Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity Distribution Agreement, we may, at our discretion, periodically issue and sell shares of our common stock for a total purchase price of $5 million. If we request advances under the Standby Equity Distribution Agreement, Cornell Capital partners will purchase shares of common stock of United for 95% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the advance notice date. Cornell Capital Partners will retain 5% of each advance under the Standby Equity Distribution Agreement. We may not request advances in excess of a total of $5 million. The maximum of each advance is equal to $100,000, and up to a maximum of $400,000, in the aggregate, in any thirty-day period. On July 16, 2004, we filed a registration statement on Form SB-2 registering shares of common stock pursuant to the Standby Equity Distribution Agreement. On July 23, 2004 the Form SB-2 registration statement was declared effective by the Securities and Exchange Commission, thus allowing us access to advances under the Standby Equity Distribution Agreement. As of March 15, 2006, the Company had not taken any draws against the Standby Equity Distribution Agreement.
OPTIONS AND WARRANT
Effective January 1, 2005, we entered into a two-year consulting agreement for management and strategic services. In addition to the monthly consulting fee, the agreement provides for warrants to purchase 28,571,428 shares of the Company's common stock. The exercise price of the warrants is $.007 per share, which equaled the bid/ask price of the Company's common stock on January 1, 2005, the effective date of the agreement. The rights to exercise the warrants shall vest in four equal tranches of 7,142,857 common shares at six months, twelve months, eighteen months, and twenty-four months. The warrants expiration date is twenty-four months after the vesting date. Further, the warrants have "piggy-back" registration rights and provide for either a cash or cashless exercise. The cashless exercise provision provides for a discount in the amount of shares to be issued upon at exercise based on a formula that takes into account as one of its factors the average of the closing sale price on the common stock for five trading days immediately prior to but not including the date of exercise. We can terminate the consulting agreement at any time for "Cause" as defined in the consulting Agreement. The consultant may terminate the consulting agreement at any time for non-payment of monies due, and such condition remains uncured for a period of sixty days. As of December 31, 2005,the rights to exercise 14,285,714 had vested under the consulting agreement and no warrants had been exercised.
TRANSFER AGENT
The transfer agent for our common stock is Transfer Online, Inc., of Portland, Oregon, and its telephone number is (503) 227-2950.
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as well as our By-Laws provide for the indemnification of directors, officers, employees and agents of the corporation to the fullest extent provided by the corporate laws of the State of Nevada, as well as is described in the Articles of Incorporation and the By-Laws. These sections generally provide that the Company may indemnify any person who was or is a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative except for an action by or in right of the corporation by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation. Generally, no indemnification may be made where the person has been determined to be negligent or guilty of misconduct in the performance of his or her duties to the Company.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons of United, pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION AUTHORIZED AND UNISSUED STOCK
The authorized but unissued shares of our common stock are available for future issuance without our shareholders' approval. These additional shares may be utilized for a variety of corporate purposes including but not limited to future public or direct offerings to raise additional capital, corporate acquisitions and employee incentive plans.
SALES OF UNREGISTERED SECURITIES
On March 23, 2004, we issued 95,000,000 shares of restricted common stock to Robert Carmichael in connection with a Share Exchange Agreement among United, Mr. Carmichael and Trebor Industries, Inc., d/b/a/ Brownie's Third Lung, a Florida corporation. Pursuant to the Share Exchange Agreement, Mr. Carmichael, the sole shareholder of Trebor, exchanged 377 shares of common stock of Trebor, which constituted all of the issued and outstanding capital stock of Trebor, for 95,000,000 shares of common stock of United. Pursuant to the Share Exchange Agreement, Trebor became a wholly-owned subsidiary of United.
On April 2, 2004, we issued 2,416,667 shares of our common stock to Cornell Capital Parnters, LP as a commitment fee pursuant to the Standby Equity Distribution Agreement, dated April 2, 2004, by and between United and Cornell Capital Partners, LP.
On April 2, 2004, we issued 83,333 shares of our common stock to Newbridge Securities Corporation as a placement agent fee in connection with the Standby Equity Distribution Agreement, dated April 2, 2004, by and between United and Cornell Capital Partners LP.
On April 2, 2004, we issued a Secured Convertible Debenture to Cornell Capital Partners, LP in the principal amount of $250,000. The convertible debenture is convertible into shares of our common stock as a price per share that is equal to the lesser of: (i) an amount equal to 120% of the closing bid price of our cowman stock as of the date of the convertible debenture or (ii) an amount equal to 80% of the average of the lowest daily volume weighted average price of our common stock for the five trading days immediately preceding the conversion date. The convertible debenture accrues interest at a rate of 5% per year and is convertible at the holder's option. The convertible debenture has a term of 2 years and is secured by all the assets of united. At United's option, the convertible debenture may be paid in cash or converted into shares of our common stock unless converted earlier by the holder. Except after an event of default, as set forth in the Secured Convertible Debenture, Cornell Capital Partners LP is not entitled to convert such debenture for a number of shares of common stock of United in excess of that number of shares which, upon giving effect to the debentures if such conversion would cause the aggregate number of shares of common stock beneficially held by such holder and its affiliated to exceed 4.99% of the outstanding shares of common stock of United. United has the right to redeem within fifteen (15) business days advance notice, a portion or all of the outstanding convertible debenture. The redemption price shall be one hundred twenty percent (120%) of the redeemed amount plus accrued interest. In addition, if United avails itself of the redemption right, United shall, concurrent with the redemption, issue warrants to the holder at a rate of 50,000 per $100,000 redeemed, pro-rata. The exercise price of the warrants shall be 120% of the closing bid price of United's common stock on the closing date. The warrants shall have "piggy-back" and demand registration rights and shall 'survive for two (2) years from the closing date.
On April 14, 2004, United issued 500,000 shares to Earl Ingarfield in connection with a consulting agreement dated January 15, 2004.
On July 23, 2004, we issued a Secured Convertible Debenture to Cornell Capital Partners LP in the principal amount of $125,000 upon the same terms and conditions as the Secured Convertible Debenture in the principal amount of $250,000 issued to Cornell Capital Partners, LP on April 2, 2004 as described above.
On January 1, 2005, we entered into a two-year consulting agreement for management and strategic services. In addition to the monthly consulting fee, the agreement provides for warrants to purchase 28,571,428 shares of the Company's common stock. The exercise price of the warrants is $.007 per share, which equaled the bid/ask price of the Company's common stock on January 1, 2005, the effective date of the agreement. The rights to exercise the warrants shall vest in four equal tranches of 7,142,857 common shares at six months, twelve months, eighteen months, and twenty-four months. The warrants expiration date is twenty-four months after the vesting date. Further, the warrants have "piggy-back" registration rights and provide for either a cash or cashless exercise. The cashless exercise provision provides for a discount in the amount of shares to be issued upon at exercise based on a formula that takes into account as one of its factors the average of the closing sale price on the common stock for five trading days immediately prior to but not including the date of exercise. We can terminate the consulting agreement at any time for "Cause" as defined in the consulting Agreement. The consultant may terminate the consulting agreement at any time for non-payment of monies due, and such condition remains uncured for a period of sixty days. As of December 31, 2005,the rights to exercise 14,285,714 had vested under the consulting agreement and no warrants had been exercised.
On February 6, 2006, Cornell Capital Partners LP was issued 6,250,000 shares of restricted common stock representing a $10,000 conversion under the terms of the Secured Convertible Debenture.
On March 7, 2006, Cornell Capital Partners LP was issued 6,250,000 shares of restricted common stock representing a $20,000 conversion under the terms of the Secured Convertible Debenture.
United believes that all transactions were transactions not involving any public offering within the meaning of Section 4(2) of the Securities Act of 1933, since (a) each of the transactions involved the offering of such securities to a substantially limited number of persons; (b) each person took the securities as an investment for his own account and not with a view to distribution; (c) each person had access to information equivalent to that which would be included in a registration statement on the applicable form under the Act; (d) each person had knowledge and experience in business and financial matters to understand the merits and risk of the investment; therefore no registration statement need be in effect prior to such issuances.
REGISTRATION OF STOCK ON FORM SB-2
On July 16, 2004, the Company filed a registration statement on Form SB-2 registering 140,500,00 shares of common stock underlying secured convertible debentures and shares of common stock pursuant to a Standby Equity Distribution Agreement, dated April 2, 2004 with Cornell Capital Partners, LP. The registration statement was declared effective by the Securities and Exchange Commission on August 6, 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
United Companies Corporation, (referred to herein as "United" or "The Company"), a Nevada corporation, entered into a Share Exchange Agreement, dated March 23, 2004, by and among United, Trebor Industries, Inc., d/b/a Brownie's Third Lung, a Florida corporation (referred to herein as "Trebor"), and Robert Carmichael. Pursuant to the Share Exchange Agreement, Mr. Carmichael exchanged 377 shares of common stock, par value $1.00 per share, of Trebor, which constituted all of the issued and outstanding shares of capital stock of Trebor, for 95,000,000 shares of common stock, par value $0.001 per share, of United. Pursuant to the Share Exchange Agreement, Trebor became a wholly-owned subsidiary of United.
Since April 16, 2004, Mr. Carmichael has served as President, Acting Principal Accounting Officer and Acting Chief Financial Officer of the Company. From March 23, 2004 to April 26, 2004, Mr. Carmichael served as United's Executive Vice-President and Chief Operating Officer. Mr. Carmichael has operated Trebor Industries, Inc. as its President since 1986. He is the holder or co-holder of numerous patents that are used by Trebor Industries, Inc. and several other major players in the diving industry. Prior to the share exchange transaction with Trebor, United had no on-going operations. United had been seeking potential operating businesses and business opportunities, with the intent to acquire or merge with such businesses.
On February 12, 2002, United filed with the Securities and Exchange Commission a Form S-4 Proxy Statement and Registration Statement in conjunction with Avid Sportswear & Golf Corp., a Nevada corporation, describing a proposed merger of Avid with and into Merger Co., a wholly-owned subsidiary of United. On January 28, 2003, the Commission declared the Form S-4 Proxy Statement and Registration Statement effective. At a special meeting of Avid shareholders held on February 20, 2003, the shareholders approved (i) the Merger Agreement, dated June 18, 2002, by and among Avid, United and Merger Co. and (ii) the related Articles of Merger. Merger Co. became the surviving entity and assumed all of Avid's assets and liabilities. At the time of the merger, outstanding shares of Avid common stock were converted automatically into shares of United common stock on a fifty (50) for one (1) basis. In the opinion of Avid's management, the excess of Avid's liabilities over its assets and the lack of available funding made any other acquisition or merger, other than the merger with Merger Co., unlikely.
Effective March 23, 2004, United sold all of its ownership interest in its wholly-owned subsidiary, Merger Co., to Gateway Connections Limited, an international business company formed under the laws of Belize.
The Company designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and Nitrox Generation Systems, and scuba and water safety products through its wholly owned subsidiary Trebor. United sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company does business as (dba) Brownie's Third Lung, the dba name of Trebor.
FINANCIAL PERFORMANCE
United has a history of losses. Trebor acquired by share exchange on March 23, 2004, has historically had both profitable and unprofitable years. For the years ended December 31, 2005 and 2004, United sustained losses of $96,310 and $510,922, respectively, which includes United's wholly-owned subsidiary Trebor.
SIGNIFICANT ACCOUNTING POLICIES
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a wide variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are as follows:
Inventory - Inventory is stated at the lower of cost or market. Cost is principally determined by using the average cost method that approximates the first-in, first-out (FIFO) accounting method. Inventory consists of raw materials as well as finished goods held for sale. The Company's management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.
Fixed assets - Fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which is primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition - Revenues from product sales are recognized when the Company's products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. Claims are included in revenues when realization is probable and the amount can be reliably estimated.
Revenue and costs incurred for time and material projects are recognized currently as the work is performed.
Product development costs - Product development expenditures are charged to expenses as incurred.
Advertising and marketing costs - The Company recognizes advertising expenses in accordance with Statement of Position 93-7 "Reporting on Advertising Costs." Accordingly, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of communicating advertisements in the period in which the advertising space or airtime is used. Advertising and trade show expenses incurred for the year ended December 31, 2005 and 2004, were $49,974, and $61,158, respectively.
Income taxes - The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. 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.
As of December 31, 2005, the Company has available a net operating loss carryforward that will expire in 2024. The Company has established a valuation allowance for 50% of the tax benefit of the operating loss carryover due to the uncertainty regarding realization.
Comprehensive income (loss) - The Company has no components of other comprehensive income. Accordingly, net loss equals comprehensive loss for all periods.
Stock-based compensation - In December 2004, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 123 revised, Accounting for Stock-Based Compensation. Under SFAS No. 123 revised, the Company will measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period the employee is required to provide service in exchange for the award. SFAS No. 123 revised, replaces SFAS No.123, and supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. In addition, SFAS No. 123 revised amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as financing cash inflow rather than as a reduction of taxes paid. The Company has elected early adoption of SFAS No. 123 for the year ended December 31, 2004. Previously, the Company had applied APB Opinion No. 25, in accounting for stock-based compensation to employees. For stock options and warrants issued to non-employees, the Company was applying SFAS No. 123, Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value. Fair value is measured based on whichever is more reliable, the cost of the good or service, or the fair value of the equity instrument issued. SFAS No. 123 revised did not change the accounting treatment as it relates to non-employee compensation based equity awards issued. Adoption of SFAS No. 123 revised during the year ended December 31, 2004 had no significant financial impact.
The Company did not issue any stock, warrants or options, to employees for compensation for the year ended December 31, 2005.
Fair value of financial instruments - The carrying amounts and estimated fair values of the Company's financial instruments approximate their fair value due to the short-term nature.
Earnings (loss) per common share - Basic earnings (loss) per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings (loss) per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings (loss) per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement changes the requirements for the accounting for and reporting of a voluntary change in accounting principle. The Statement requires retrospective application of prior periods' financial statement of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one of more individual periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. The Statement carries forward the without change the guidance contained in APB opinion No. 20 for reporting the correction of an error in previously issued financial statements, a change in accounting estimate, and guidance regarding justification of a change in accounting principle on the basis of preferability. The Statement is effective for all fiscal years beginning after December 31, 2005. As allowed by the Statement, the Company adopted early application in June 2005 with no significant financial impact.
In March, 2005, the FASB issued Summary of Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations - an interpretation of
FASB Statement No. 143. The Interpretation clarifies that the term "conditional
asset retirement obligation" as used in FASB Statement No. 143, Accounting for
Asset Retirement Obligations, refers to legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within control of the
entity. The Interpretation directs that the entity is required to recognize a
liability for the fair value of the conditional asset retirement obligation if
the fair value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred - generally upon acquisition, construction, or development and
(or) through the normal operation of the asset. The Interpretation further
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation acknowledging that in
some cases this information may not be available. The Interpretation is
effective no later than the end of the fiscal years ending after December 15,
2005 (December 31, 2005 for calendar year enterprises). As encouraged by the
FASB, the Company elected early application of this Interpretation in the year
ended December 31, 2005 without significant financial impact.
In December 2004, the FASB issued SFAS No. 123 revised, Accounting for Stock-Based Compensation. Under SFAS No. 123 revised, the Company will measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period the employee is required to provide service in exchange for the award. SFAS No. 123 revised, replaces SFAS No.123, and supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. In addition, SFAS No. 123 revised amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as financing cash inflow rather than as a reduction of taxes paid. The Company elected early adoption of SFAS No. 123 during the year ended December 31, 2004 without significant financial impact. Previously, the Company had applied APB Opinion No. 25, in accounting for stock-based compensation to employees. For stock options and warrants issued to non-employees, the Company was applying SFAS No. 123, Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value. Fair value is measured based on whichever is more reliable, the cost of the good or service, or the fair value of the equity instrument issued. SFAS No. 123 revised did not change the accounting treatment as it relates to non-employee compensation based equity awards issued.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets-Amendment of APB Opinion No. 29. This statement amends APB Opinion 29 that is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 eliminates APB No. 29's exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Commercial substance is assumed if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company elected early adoption of this statement during the year ended December 31, 2004 with no significant financial impact.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs-Amendment of ARB No. 43. The statement amends the guidance in ARB No. 43 regarding "inventory pricing" to clarify the accounting for "abnormal" amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 calls for the treatment of these costs as period costs regardless of the normal or "abnormal" nature of them. SFAS No. 151 eliminates the "so abnormal" classification provision found in ARB No. 43. The Company elected early adoption of this statement during the year ended December 31, 2004, with no significant financial impact.
In December 2003, the FASB issued Interpretation No. 46 revised , Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. The Interpretation addresses consolidation by business enterprises of variable interest entities and was effective immediately for variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities acquired before February 1, 2003. The Company adopted the Interpretation during the year ended December 31, 2004 with no significant financial impact.
The following discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to allowance for doubtful accounts and deferred income tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
The following discussion of United's results of operations compares United's year ended 2005 operations activities, which includes the results of operations for United's wholly-owned subsidiary Trebor Industries, Inc., d/b/a Brownie's Third Lung.
NET REVENUES. For the year ended December 31, 2005, we had net revenues of $2,935,869 as compared to net revenues of $2,974,377 for the year ended December 31, 2004, a decrease of $38,508 or 1.29%. Overall core tankfill system sales and hookah system sales were up in 2005. The slight decline in overall sales is mainly attributed to the net of the overall increase in hookah and non-custom tankfill sales reduced by the fact that there was an approximate $380,000 custom tankfill sale in 2004 that was not repeated in 2005. While we still had custom tankfill sales in 2004, they were more numerous but each individually of smaller magnitude. Overall, the Company is moving toward making all its tankfill systems more standardized and easily adaptable to a wider range of vessels as part of its sales strategy. The Company attributes overall increases in the hookah system sales to annualized buy promotions offered to dealers in 2005, to its web-based training program that was rolled out in July 2005, and to concerted marketing and sales efforts, including a release in July 2005 of a brand new catalog featuring all of our products. Non-custom tankfill system sales increases are mainly attributed to our standalone presence at several boat shows in 2005 (in earlier years shared booth space with a Brownie dealer resulted in shared tankfill revenues), three new OEM relationships with yacht-builders, as well as the release of the new catalog featuring all of our products. In addition, we believe that the Brownie's Third Lung name continues to grow in brand recognition, and in addition to gaining new customers each year, we see repeat business through brand loyal customers.
COST OF NET REVENUES. For the year ended December 31, 2005, we had cost of net revenues of $1,956,269, as compared with cost of net revenues of $2,020,615 for the year ended December 31, 2004, a decrease of $64,346 or 3.18%. This net decrease is primarily attributable to an increase in material costs of $45,178 primarily due to the higher costs of some components used in the assembly of our hookah and tankfill systems, a decrease of in direct labor of $71,174 as a result of streamlining production, a decrease in overhead of $79,801 primarily attributable to the discounted royalty fee directly related to product sales, an increase of $44,679 that represents direct labor that was not allocated to research and development projects in 2005 that was in 2004 to focus more on production rather than research and development in 2005.
GROSS PROFIT. For the year ended December 31, 2005, we had a gross profit of $979,600, as compared to gross profit of $953,762 for the year ended December 31, 2004, an increase of $25,838 or 2.71%. Although Net Revenues were $38,508 less in 2005 than in 2004, the decline was positively overshadowed by the $64,346 decline in the Cost of Net Revenues from 2004 to 2005.
OPERATING EXPENSE. For the year ended December 31, 2005, we had total operating expenses of $999,226 as compared to total operating expenses of $1,121,070 for the year ended December 31, 2004, a decrease of $121,844 or 10.87%. This decrease is comprised of a $54,550 decrease in research and development and a $67,294 decrease in selling, general and administrative costs. Research and Development (R&D) cost has predominantly been an allocation of in-house labor from its various functional categories to R&D for time spent in this area. In line with cost cutting measures and to focus on profits and cash flows, labor was utilized more in the area of production and generating revenue instead of R&D during 2005 as compared to 2004 resulting in the decrease. The decrease in selling, general and administrative expenses is comprised primarily of decreases in advertising, travel, and office supplies of approximately $11,000, $26,000, and $10,000, respectively. The additional approximate $20,000 decrease is comprised of decreases in most every other controllable expense category as well. This too is in line with the aforementioned cost cutting measures to improve profitability and cash flow.
OTHER EXPENSE (INCOME). For the year ended December 31, 2005 we had other expense of $14,898 as compared to $87,539 of other income for the year ended December 31, 2004, a decrease in other income, or an increase of other expense of $102,437 or 117.02%. The decrease in other income is primarily attributable to the recovery of a fully reserved debt of $76,696, a reduction to the reserve for uncollectable accounts of $8,796, and settlement of a tax liability for less than recorded by $6,113, all recorded in 2004, whereas in 2005 the largest item in this account is a $13,500 expense for a potential liability on a disputed governmental assessment.
INTEREST EXPENSE. For the year ended December 31, 2005, we had interest expense of $85,992 as compared to $431,153 for the year ended December 31, 2004, a decrease of $345,161 or 80.06%. This decrease is primarily attributable to recording approximately $340,000 in interest for the intrinsic value of the conversion feature of the two secured convertible debentures recorded in 2004, $285,714 and $55,288 recorded in the second and third quarters, respectively. There were no such transactions in 2005.
PROVISION FOR INCOME TAX BEFEFIT. For the year ended December 31, 2005, we had a tax benefit of $24,206 as compared to $0 tax benefit at December 31, 2004, an increase of $24,206. This increase is primarily attributable to the reduction of the valuation allowance against net deferred tax asset in 2005. The net deferred tax asset, primarily attributable to a federal income tax operating loss carryfoward that originated in the year ended 2004, was fully reserved in 2004. Since the Company anticipates utilizing part of this net operating loss carryforward beginning in the year ended 2005, and more going forward, management changed its estimate of the valuation allowance accordingly which resulted in the tax benefit of $24,206.
NET LOSS. For the year ended December 31, 2005, we had a net loss of $96,310 as compared to a net loss of $510,922 for the year ended December 31, 2004, a decrease of $414,612 or 81.15%. This decrease is attributable to the decrease in interest expense of $345,161, the decrease in operating expenses of $121,844, the net change in other expense of $102,437, the increase in gross profit margin of $25,838, and the increase in the tax provision for the tax benefit of $24,206.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, the Company had cash and current assets of $538,413. As of December 31, 2005, we had current liabilities of $986,147 consisting of accounts payable and accrued liabilities $465,807, customer deposits of $129,131, other liabilities of $50,225, notes payable - current portion of $9,967, and notes payable - related parties - current portion of $31,407, and convertible debenture $299,601. As of December 31, 2005, we had a working capital deficit of $447,734. It appears that external financing may be necessary to fund some of our operations for the foreseeable future.
On April 2, 2004, we entered into a Standby Equity Distribution Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity Distribution Agreement, we may, at our discretion, periodically issue and sell shares of our common stock for a total purchase price of $5 million. If we request advances under the Standby Equity Distribution Agreement, Cornell Capital partners will purchase shares of common stock of United for 95% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the advance notice date. Cornell Capital Partners will retain 5% of each advance under the Standby Equity Distribution Agreement. We may not request advances in excess of a total of $5 million. The maximum of each advance is equal to $100,000, and up to a maximum of $400,000, in the aggregate, in any thirty-day period. On July 16, 2004, we filed a registration statement on Form SB-2 registering shares of common stock pursuant to the Standby Equity Distribution Agreement. On August 6, 2004, the Form SB-2 registration statement was declared effective by the Securities and Exchange Commission, thus allowing us advances under the Standby Equity Distribution Agreement. As of March 15, 2006, the Company had not taken any draws against the Standby Equity Distribution Agreement.
As of April 2, 2004, we issued a Secured Convertible Debenture to Cornell Capital Partners, LP in the principal amount of $250,000. The Secured Convertible Debenture is convertible into shares of our common stock as a price per share that is equal to the lesser of: (i) an amount equal to 120% of the closing bid price of our common stock as of the date of the Secured Convertible Debenture or (ii) an amount equal to 80% of the average of the lowest daily volume weighted average price of our common stock for the five trading days immediately preceding the conversion date. The Secured Convertible Debenture accrues interest at a rate of 5% per year and is convertible at the holder's option. The Secured Convertible Debenture has a term of 2 years. At United's option, the convertible debenture may be paid in cash or converted into shares of our common stock unless converted earlier by the holder. Except after an event of default, as set forth in the Secured Convertible Debenture be entitled to convert such debenture for a number of shares of common stock of United in excess of that number of shares which, upon giving effect to such conversion, would cause the aggregate number of shares of common stock beneficially held by such holder and its affiliated to exceed 4.99% of the outstanding shares of common stock of United. On July 23, 2004, we issued a second Secured Convertible Debenture in the principal amount of $125,000, with the same terms and conditions as the Secured Convertible Debenture issued on April 2, 2004, as described above.
CERTAIN BUSINESS RISKS
The Company is subject to various risks that may materially harm its business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase the Company's common stock. These are not the only risks and uncertainties that the Company faces. If any of these risks or uncertainties actually occurs, the Company's business, financial condition or operating results could be materially harmed. In that case, the trading price of the Company's common stock could decline and you could lose all or part of your investment.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
On March 23, 2004, United entered into a share exchange transaction with Trebor Industries, Inc., d/b/a Brownie's Third Lung and Robert Carmichael. Pursuant to this share exchange transaction, United acquired all of the issued and outstanding capital stock of Trebor Industries and Trebor Industries became a wholly-owned subsidiary of United. Trebor Industries designs, manufactures and sells surface-supplied air units for the recreational diving industry. United has a history of losses. Historically, Trebor has had both profitable and unprofitable years. As of December 31, 2005, we had an accumulated deficit of $1,706,901. For the years ended December 31, 2005 and 2004, we incurred a net loss of $96,310 and $510,922, respectively. Trebor incurred a net loss of $187,609 for the year ended December 31, 2003 and incurred a net profit of $2,747 for the year ended December 31, 2002.
If we incur any problems in drawing down our Standby Equity Distribution Agreement, we may experience significant liquidity and cash flow problems. If we are not successful in reaching and maintaining profitable operations, we may not be able to attract sufficient capital to continue our operations. Our inability to obtain adequate financing will result in the need to curtail business operations and will likely result in a lower stock price.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
As of December 31, 2005, we had $30,345 of cash on hand and our total current assets were $538,413. Our current liabilities were $986,147 as of December 31, 2005. We may need to raise additional capital to fund our anticipated operating expenses. Among other things, external financing may be required to cover our operating costs. Unless we obtain profitable operations, it is unlikely that we will be able to secure additional financing from external sources. As of March 15, 2006, we estimate that we will require $1 million to fund our anticipated operating expenses for the next twelve months if we maintain sales growth at the same rate. To step up sales growth at a more aggressive rate, we would require approximately $1.5 to $2.5 million to fund our anticipated operating expenses for the next twelve months. The sale of our common stock to raise capital may cause dilution to our existing shareholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price. Our inability to obtain adequate financing will result in the need to curtail business operations and you could lose your entire investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
WE ARE SUBJECT TO A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS ON DECEMBER 31, 2005 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES
We had a working capital deficit of $447,734 at December 31, 2005, which means that our current liabilities as of that date exceeded our current assets by $447,734. Current assets are assets that are expected to be converted to cash within one year and, therefore, may be used to pay current liabilities as they become due. Our working capital deficit means that our current assets on December 31, 2005 were not sufficient to satisfy all of our current liabilities on that date. If our ongoing operations do not begin to provide sufficient profitability to offset the working capital deficit we may have to raise capital or debt to fund the deficit.
OUR OBLIGATIONS UNDER THE SECURED CONVERTIBLE DEBENTURES ISSUED TO CORNELL
CAPITAL PARTNERS, L.P. ARE SECURED BY ALL OF OUR ASSETS
Our obligations under the secured convertible debentures in the principal amount of $299,610 issued to Cornell Capital Partners, LP are secured by all of our assets. As a result, if we default under the terms of these secured convertible debentures, Cornell Capital Partners, LP could foreclose its security interest and liquidate all of the assets of the Company. This would force us to cease our operations.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY
FLUCTUATE SIGNIFICANTLY
Our common stock is traded on the Over-the-Counter Bulletin Board. Prior to this offering, there has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS WHEN NEEDED UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT AND THE PRICE OF OUR COMMON STOCK WILL AFFECT OUR ABILITY TO DRAW DOWN ON THE STANDBY EQUITY DISTRIBUTION AGREEMENT
Currently, we are dependent upon external financing to supplement our operations. Our financing needs are expected to be provided, in part, by our Standby Equity Distribution Agreement. The amount of each advance under the Standby Equity Distribution Agreement is subject to a maximum amount equal to $100,000 and up to an aggregate maximum advance amount equal to $400,000 in any thirty-calendar-day period. Because of this maximum advance restriction, we may not be able to access sufficient funds when needed.
In addition, there is an inverse relationship between the price of our common stock and the number of shares of common stock, which will be issued under the Standby Equity Distribution Agreement. Based on our recent stock price of $0.0089, we would have to issue to Cornell Capital Partners, LP 561,797,753 shares of our common stock in order to draw down the entire $5 million available to us under the Standby Equity Distribution Agreement. On July 16, 2004, we filed with the United States Securities and Exchange Commission a registration statement on Form SB-2 registering 118,000,000 shares of our common stock under the Standby Equity Distribution Agreement. Our Articles of Incorporation currently authorize United to issue 250 million shares and, as of March 15, 2006, we had 148,970,677 shares of common stock issued and outstanding. In the event we desire to draw down any available amounts remaining under the Standby Equity Distribution Agreement after we have issued the 118,000,000 shares that we registered in the Form SB-2, we will have to obtain shareholder approval to amend our Articles of Incorporation to increase our authorized shares of common stock and file a new registration statement to cover such additional shares that we would issue for additional draw downs on the Standby Equity Distribution Agreement. Unless we obtain profitable operations, it is unlikely that we will be able to secure additional financing from external sources other than our Standby Equity Distribution Agreement. Therefore, if we are unable to draw down on our Standby Equity Distribution Agreement, we may be forced to curtail our business operations. The Standby Equity Distribution Agreeement expires on August 6, 2006.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system (Nasdaq listed stock must still have a price of not less than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer. Mr. Carmichael has been instrumental in securing our existing financing arrangements. Mr. Carmichael is primarily responsible for the development of our technology and the design of our products. The loss of the services of Mr. Carmichael could materially harm our business because of the cost and time necessary to recruit and train a replacement. Such a loss would also divert management attention away from operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.
In addition, our continued growth depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer, and additional skilled associates. We are currently utilizing the services of two professional consultants in the absence of a Chief Financial Officer and Chief Operations Officer. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer may have a material adverse effect upon us. Also, there can be no assurance that we will be able to retain our existing personnel or attract additional qualified associates in the future.
Effective January 1, 2005, the Company entered into a two-year consulting agreement with one of the Consultants as referred to above for management and strategic services. The consulting agreement calls for a monthly consulting fee and provides for warrants to purchase 28,571,428 shares of the Company's Common Stock. The exercise price of the warrants is $.007 per share, which equaled the bid/ask price of the Company's Common stock on January 1, 2005, the effective date of the agreement. The rights to exercise the warrants shall vest in four equal tranches of 7,142,857 current shares at six months, twelve months, eighteen months, and twenty-four months. The Company can terminate the Consulting Agreement at any time for "Cause" as defined in the Consulting Agreement. The Consultant may terminate the Consulting Agreement at any time for non-payment of monies due, and such condition remains uncured for a period of sixty days.
OUR FAILURE TO OBTAIN INTELLECTUAL PROPERTY AND ENFORCE PROTECTION WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our success depends in part on our ability, and the ability of our Patent and Trademark Licensors, entities owned and controlled by Robert M. Carmichael, our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection.
Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
WE MAY BE UNABLE TO MANAGE GROWTH
Successful implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial resources. If we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed, and our stock price may decline.
RELIANCE ON VENDORS AND MANUFACTURERS
We deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing. In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility capacity. Historically, we have purchased enough inventory of products or their substitutes to satisfy demand. However, unanticipated failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail or cease operations.
DEPENDENCE ON CONSUMER SPENDING
The success of product sales in the Brownie's Third Lung and Brownie's TankFill categories depends largely upon a number of factors related to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In addition our opportunities are highly dependent upon the level of consumer spending on recreational marine accessories and dive gear, discretionary spending items. There can be no assurance that consumer spending in general will not decline, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by future downturns in the economy, boating industry, or dive industry. If consumer spending on recreational marine accessories and dive gear declines, we could be forced to curtail or cease operations.
GOVERNMENT REGULATIONS MAY IMPACT US
The SCUBA industry is self-regulating; therefore, Brownie's is not subject to government industry specific regulation. Nevertheless, Brownie's strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through responsible diving practices. Brownie's is subject to all regulations applicable to "for profit" companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive regulations in the future, which could force us to curtail or cease operations.
BAD WEATHER CONDITIONS COULD HAVE AN ADVERSE EFFECT ON OPERATING RESULTS
Our business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative of results of any future period.
INVESTORS SHOULD NOT RELY ON AN INVESTMENT IN OUR STOCK FOR THE PAYMENT OF
CASH DIVIDENDS
We have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result of any appreciation, if any, in our stock price.
THE MANUFACTURE AND DISTRIBUTION OF RECREATIONAL DIVING EQUIPMENT COULD
RESULT IN PRODUCT LIABILITY CLAIMS
We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any. We do not anticipate obtaining contractual indemnification from parties-supplying raw materials, manufacturing our products or marketing our products. In any event, any such indemnification if obtained will be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations.
ITEM 7. FINANCIAL STATEMENTS
Our consolidated financial statements appear beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
ITEM 8A. CONTROLS AND PROCEDURES
Annual Evaluation Of The Company's Disclosure Controls And Internal
Controls. Within the 90 days prior to the date of this Annual Report on Form
10-KSB, the Company evaluated the effectiveness of the design and operation of
its "disclosure controls and procedures" (Disclosure Controls), and its
"internal controls and procedures for financial reporting" (Internal Controls).
This evaluation was done under the supervision and with the participation of
management, including our Chief Executive Officer (CEO)/Chief Financial Officer
(CFO). Rules adopted by the SEC require that in this section of the Annual
Report we present the conclusions of the CEO/CFO about the effectiveness of our
Disclosure Controls and Internal Controls based on and as of the date of the
Controls Evaluation. CEO/CFO Certification. Appearing immediately following the
Signatures section of this Annual Report there are two separate forms of
"Certifications" of the CEO/CFO. The second form of Certification is required in
accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certification). This section of the Annual Report that you are currently reading
is the information concerning the Controls Evaluation referred to in the Section
302. Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
Disclosure Controls And Internal Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO/CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.
Scope Of The Controls Evaluation. The CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls' objectives and design, the controls' implementation by the Company and the effect of the controls on the information generated for use in this Annual Report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.
In accord with SEC requirements, the CEO/CFO notes that, since the date of the Controls Evaluation to the date of this Annual Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Conclusions. Based upon the controls evaluation, our CEO/CFO has concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to the Company is made known to management, including the CEO/CFO, particularly during the period when our periodic reports are being prepared, and that our internal controls are effective to provide reasonable assurance that (1) our transactions are properly authorized, (2) our assets are safeguarded against unauthorized or improper use, and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 1B(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, executive officers and key employees as of March 8, 2005 are as follows:
NAME: AGE: POSITION: -------------------- --- ------------------------------------------------ Robert M. Carmichael 44 President, Chief Executive Officer and Director |
ROBERT M. CARMICHAEL. Since April 16, 2004, Mr. Carmichael has served as United's President, Chief Executive Officer and Director. From March 23, 2004 through April 16, 2004, Mr. Carmichael served as United's Executive Vice-President and Chief Operating Officer. Prior to the share exchange transaction between United and Trebor Industries, Mr. Carmichael operated Trebor Industries as its President since 1986. Mr. Carmichael is the holder or co-holder of numerous patents that are used by Trebor Industries and several other major companies in the diving industry.
DIRECTORS
Our Board of Directors consists of five (5) seats, with Robert Carmichael currently serving as the sole director. Directors serve for a term of one year and stand for election at our annual meeting of stockholders. Pursuant to our Bylaws, a majority of directors may appoint a successor to fill any vacancy on the Board of Directors.
COMMITTEES
Currently, United has not established any committees of the Board of Directors.
COMPENSATION OF DIRECTORS
Members of United's Board of Directors are reimbursed for all out of pocket expenses incurred in connection with the attendance at any Board meeting or in connection with any services they provide for and on behalf of United.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange commission initial reports of ownership and reports of changes in ownership of Common Stock and other of our equity securities. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us copies of all Section 16(a) forms they file.
Based on available information, we believe that all filings with respect to Section 16(a) are current.
CODE OF ETHICS
United has adopted a formal code of ethics that applies to our principal executive officer and principal accounting officer, all other officers, directors and employees. This code of ethics was filed with the Securities and Exchange Commission as an exhibit to our Annual Report for the year ended December 31, 2003.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by United, as well as certain other compensation paid or accrued, during the fiscal years ended December 31, 2005, 2004 and 2003 to United's named executive officers. No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, were paid to these executive officers during these fiscal years.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------- ---------------------------------------
AWARDS PAYOUTS
------------------------ ------------
RESTRICTED
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) LTIP COMPENSATION
POSITION(S) YEAR ($) ($) ($) (#) PAYOUTS ($) ($)
-------------------- ---- ----------- ----- ------------ ---------- ----------- ------------
Robert M. Carmichael, 2005 $ 77,962.50 $ -- $ -- -- $ -- $ --
President and Chief 2004 $ 81,010.64 $ -- $ -- -- $ -- $ --
Executive Officer 2003 $ 77,571.44 $ -- $ -- -- $ -- $ --
|
(1) Mr. Carmichael became President and Chief Executive Officer of Trebor Industries on September 17, 1981
The following table contains information regarding options granted during the year ended December 31, 2005 to United's named executive officer.
OPTION/SAR GRANTS TABLE
% TOTAL
OPTIONS/SAR'S
GRANTED TO
NO. OF SECURITIES EMPLOYEES IN YEAR
UNDERLYING ENDED DECEMBER 31
OPTIONS/SAR'S 2005 EXERCISE OR BASE PRICE
NAME GRANTED (#) (%) ($ PER SHARE) EXPIRATION DATE
--------------------- ----------------- ----------------- ---------------------- ---------------
Robert M. Carmichael, None N/A N/A N/A
President and Chief
Executive Officer
|
The following table contains information regarding options exercised in the year ended December 31, 2005, and the number of shares of common stock underlying options held as of December 31, 2005, by United's named executive officer.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS/SAR'S OPTIONS/SAR'S
ACQUIRED ON VALUE AT FY-END AT FY-END
EXERCISE REALIZED (#) ($)
------------ -------- ------------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- ------------ -------- ------------------------------- ---------------------------
Robert M. Carmichael, -- -- -- -- -- --
President and Chief
Executive Officer
|
STOCK OPTION GRANTS IN THE PAST FISCAL YEAR
We have not issued any grants of stock options in the past fiscal year to any officer or director.
EMPLOYMENT AGREEMENTS
Currently, we do not have employment agreements with any of our employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information about the beneficial ownership of our common stock as of March 15, 2006 by (i) each person who we know is the beneficial owner of more than 5% of the outstanding shares of common stock (ii) each of our directors or those nominated to be directors, and executive officers, and (iii) all of our directors and executive officers as a group.
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OWNED PERCENT OWNED
-------------------------------------- ------------ -------------
Robert M. Carmichael 95,000,000 63.77%
940 N. W. 1st Street
Fort Lauderdale, Florida
All officers and directors as a group 95,000,000 63.77%
(1 person)
---------------
|
* Represents less than 1%.
(1) Applicable percentage of ownership is based on 148,970,677 shares of
common stock outstanding as of March 15, 2006 together with securities
exercisable or convertible into shares of common stock within 60 days of
March 15, 2006 for each stockholder. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to securities exercisable or convertible into shares of common
stock that are currently exercisable or exercisable within 60 days of
March 15, 2006 are deemed to be beneficially owned by the person holding
such options for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Notes payable - related parties - Notes payable - related parties consists
of the following as of December 31, 2005:
Promissory note payable to the Chief Executive Officer of the Company,
unsecured, bearing interest at 10% per annum, due in monthly principal and
interest payments of $3,924, maturing on March 1, 2010, with a balloon
payment of $431,795 due. The note will be discounted 15% of the
outstanding principal balance if it is paid in full by April, 1 2007. $ 445,271
Promissory note payable to an entity owned by the Company's Chief
Executive Officer, unsecured, bearing interest at 10% per annum, due in
monthly principal and interest payments of $1,802, maturing on March 1,
2010, with a balloon payment of $198,264 due. The note will be discounted
15% of the outstanding principal balance if it is paid in full by April 1,
2007. 204,451
Promissory note payable due an entity owned by the Company's Chief
Executive Officer, unsecured, bearing 0% interest per annum, due in
monthly principal only payments of $2,292, maturing on February 15, 2007.
32,082
----------
681,804
Less amounts due within one year 31,407
----------
Long-term portion of Notes payable - related parties $ 650,397
==========
|
As of December 31, 2005, principal payments on the Notes payable - related parties are as follows:
2006 $ 31,407
2007 8,900
2008 4,769
2009 5,268
2010 631,460
----------
$ 681,804
==========
|
Revenues - The Company sells products to two entities owned by the brother of the Company's Chief Executive Officer, Brownie's Southport Divers, Inc. and Brownie's Palm Beach Divers. Terms of sale are no more favorable than those extended to any of the Company's other customers. Combined revenue from these entities for the year ended December 31, 2005, and 2004, was $650,925 and $644,320, respectively. Combined accounts receivable related to these entities was $10,376 and $0 at December 31, 2005 and 2004, respectively.
Royalties - The Company has Non-Exclusive License Agreements with an entity in which the Company's Chief Executive Officer has an ownership interest to license product patents it owns. Based on the Agreements with the entity, the Company pays royalties ranging from $1.00 to $50.00 per licensed products sold, with rates increasing 5% annually. With the same entity, the Company has a Non-Exclusive License Agreement to license a trademark of products owned by the entity. Based on the Agreement, the Company will pay the entity $0.25 per licensed products sold, with rates increasing $0.05 annually.
The Company has Non-Exclusive License Agreements with an entity owned by the Company's Chief Executive Officer to license product patents it owns. Previous Agreements in effect with this entity were renegotiated and New Agreements were entered into effective January 1, 2005. Under the terms of the new Agreements, the Company pays the other related entity $2.00 per licensed products sold, rates increasing 5% annually, with a 75% royalty fee discount period through December 31, 2005, after which time the royalty rate will return to 100%. With the same entity, the Company has an Exclusive License Agreement to license the trademark "Brownies Third Lung", "Tankfill", "Brownies Public Safety" and various other related trademarks as listed in the Agreement. The one Agreement replaced several earlier license agreements and was effective January 1, 2005. Based on the Agreement, the Company will pay the entity 2.5% of gross revenues per quarter, with a 75% royalty fee discount period through December 31, 2005. Under the Agreement the royalty rate was to return to 100% at January 1, 2006, however, a new agreement was negotiated effective January 1, 2006, and is provided as Exhibit 10.26 to this Form 10KSB.
Total royalty expense for the above agreements for the years ended December 31, 2005 and 2004, was $20,415 and $96,888, respectively. As of December 31, 2005, the Company was in arrears on royalty payments by $17,565. This amount is included in Other liabilities on the face of the balance sheet. The related parties continue to work with the Company regarding payment and no notices of default have been issued as a result.
Lease Expense - The Company leases its facility from an entity in which the Chief Executive Officer has an ownership interest. For the year ended December 31, 2005, and 2004, lease expense was $130,602, and $130,864, respectively. As of December 31, 2005, the Company was in arrears on lease payments by $18,950. The Company is making reduced rental payments, with the intention to bring the liability current by mid 2006. The landlord continues to work with the Company under this arrangement and has not issued an official notice of default as a result.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
EXHIBIT NO. DESCRIPTION LOCATION
----------- ------------------------------------------------ ----------------------------------------------
2.2 Merger Agreement, dated June 18, 2002 by and Incorporated by reference to Exhibit 2.02 to
among United Companies Corporation, Merger Co., Avid Sportswear & Golf Corp.'s Amendment No. 1
Inc. and Avid Sportswear & Golf Corp. to Form S-4 filed June 24, 2002
2.3 Articles of Merger of Avid Sportswear & Golf Incorporated by reference to Exhibit 2.03 to
Corp. with and into Merger Co., Inc. Avid Sportswear & Golf Corp.'s Amendment No. 1
to Form S-4 filed June 24, 2002
3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.05 to
United Companies Corporation's Amendment No. 1
to Form S-4 filed June 24, 2002
3.2 Bylaws Incorporated by reference to Exhibit 3.04 to
the Registration Statement on Form 10-SB
10.1 Share Exchange Agreement, dated March 23, 2004 Incorporated by reference to Exhibit 16.1 to
by and among United, Trebor Industries, Inc. and Current Report on From 8-K filed April 9, 2004
Robert Carmichael
10.2 Securities Purchase Agreement, dated April 2, Incorporated by reference to Exhibit 10.2 to
2004 by and between United and Cornell Capital United Companies Corporation's Registration
Partners, L.P. Statement on Form SB-2 filed July 16, 2004
10.3 Investor Registration Rights Agreement, dated Incorporated by reference to Exhibit 10.3 to
April 2, 2004 by and between United and Cornell United Companies Corporation's Registration
Capital Partners, L.P. Statement on Form SB filed July 16, 2004
10.4 Security Agreement, dated April 2, 2004 by and Incorporated by reference to Exhibit 10.4 to
between United and Cornell Capital Partners, L.P. United Companies Corporation's Registration
Statement on Form SB filed July 16, 2004
10.5 Irrevocable Transfer Agent Instructions, dated Incorporated by reference to Exhibit 10.5 to
April 2, 2004, by and among United, Cornell United Companies Corporation's Registration
Capital Partners, L.P. and First American Stock Statement on Form SB filed July 16, 2004
Transfer
10.6 Escrow Agreement, dated April 2, 2004 by and Incorporated by reference to Exhibit 10.6 to
among United, Cornell Capital Partners, L.P. and United Companies Corporation's Registration
Butler Gonzalez, LP Statement on Form SB filed July 16, 2004
10.7 Form of Secured Convertible Debenture Incorporated by reference to Exhibit 10.7 to
United Companies Corporation's Registration
Statement on Form SB filed July 16, 2004
10.8 Form of Warrant Incorporated by reference to Exhibit 10.8 to
United Companies Corporation's Registration
Statement on Form SB filed July 16, 2004
10.9 Standby Equity Distribution Agreement, dated Incorporated by reference to Exhibit 10.9 to
April 2, 2004 by and between United and Cornell United Companies Corporation's Registration
Capital Partners, L.P. Statement on Form SB filed July 16, 2004
10.10 Registration Rights Agreement, dated April 2, Incorporated by reference to Exhibit 10.10 to
2004 by and between United and Cornell Capital United Companies Corporation's Registration
Partners, L.P. Statement on Form SB filed July 16, 2004
|
EXHIBIT NO. DESCRIPTION LOCATION
----------- ------------------------------------------------ ----------------------------------------------
10.11 Escrow Agreement, dated April 2, 2004 by and Incorporated by reference to Exhibit 10.11 to
among United, Cornell Capital Partners, L.P. and United Companies Corporation's Registration
Butler Gonzalez, LP Statement on Form SB filed July 16, 2004
10.12 Placement Agent Agreement, dated April 2, 2004, Incorporated by reference to Exhibit 10.12 to
by and among United, Cornell Capital Partners, United Companies Corporation's Registration
L.P. and Newbridge Securities Corporation Statement on Form SB filed July 16, 2004
10.13 Irrevocable Transfer Agent Instructions, dated Incorporated by reference to Exhibit 10.13 to
April 2, 2004 by and among United, Cornell United Companies Corporation's Registration
Capital Partners, L.P. and First American Stock Statement on Form SB filed July 16, 2004
Transfer
10.14 Two Year Consulting Agreement with Jeff Morris Incorporated by reference to Exhibit 10.14 to
effective January 1, 2005 for Manage-ment and Current Report on Form 8-K filed on March 11,
Strategic Services and Warrants issued in 2005.
conjunction with the same.
10.15 Promissory Note, dated February 15, 2005, Incorporated by reference to Exhibit 10.15 to
principal amount of $54,998.00 payable to Robert United Companies Corporation's 10QSB for the
M. Carmichael. quarter ended March 31, 2005 filed May 13, 2005.
10.16 Prommissory Note, dated March 7, 2005, in the Incorporated by reference to Exhibit 10.16 to
principal amount of $205,296.53 payable to 940 United Companies Corporation's 10QSB for the
Associates, Inc. quarter ended March 31, 2005 filed May 13, 2005.
10.17 Prommissory Note, dated March 7, 2005, in the Incorporated by reference to Exhibit 10.17 to
principal amount of $447,111.13 payable to United Companies Corporation's 10QSB for the
Robert M. Carmichael. quarter ended March 31, 2005 filed May 13, 2005.
10.18 Non-Exclusive License Agreement - Incorporated by reference to Exhibit 10.18 to
BC Keel Trademark United Companies Corporation's 10QSB for the
quarter ended June 30, 2005 filed August 15,
2005.
10.19 Non-Exlusive License Agreement - Bouyancy Incorporated by reference to Exhibit 10.18 to
Compensator (and Dive Belt) Weight System United Companies Corporation's 10QSB for the
quarter ended June 30, 2005 filed August 15,
2005.
10.20 Exclusive License Agreeement - Brownie's Third Incorporated by reference to Exhibit 10.18 to
Lung, Brownie's Public Safety, Tankfill, and United Companies Corporation's 10QSB for the
Related Trademarks and quarter ended June 30, 2005 filed August 15,
Copyrights 2005.
10.21 Non-Exclusive License Agreement - Incorporated by reference to Exhibit 10.18 to
Drop Weight Dive United Companies Corporation's 10QSB for the
Belt quarter ended June 30, 2005 filed August 15,
2005.
|
EXHIBIT NO. DESCRIPTION LOCATION
----------- ------------------------------------------------ ----------------------------------------------
10.22 Non-Exclusive License Agreement - Incorporated by reference to Exhibit 10.18 to
Garment Integrated or Garment Attachable United Companies Corporation's 10QSB for the
Flotation Aid and/or PFD quarter ended June 30, 2005 filed August 15,
2005.
10.23 Non-Exclusive License Agreement - Incorporated by reference to Exhibit 10.18 to
Inflatable Dive Market and Collection United Companies Corporation's 10QSB for the
Bag quarter ended June 30, 2005 filed August 15,
2005.
10.24 Non-Exclusive License Agreement - SHERPA Incorporated by reference to Exhibit 10.18 to
Trademark and Inflatable Flotation Aid/Signal United Companies Corporation's 10QSB for the
Device quarter ended June 30, 2005 filed August 15,
Technology 2005.
10.25 Non-Exclusive License Agreement - Tank- Incorporated by reference to Exhibit 10.18 to
Mounted Weight, BC or PFD-Mounted Trim Weight or United Companies Corporation's 10QSB for the
Trim Weight Holding System quarter ended June 30, 2005 filed August 15,
2005.
10.26 Exclusive License Agreement - Brownie's Third Provided herewith
Lung and Related Trademarks and Copyright
31.1 Certification Pursuant to Section 3.02 Provided herewith
31.2 Certification Pursuant to Section 3.02 Provided herewith
32.1 Certification Pursuant to Section 1350 Provided herewith
32.2 Certification Pursuant to Section 1350 Provided herewith
|
(B) REPORTS ON FORM 8-K.
We filed a Current Report on Form 8-K on March 11, 2005 with respect to Item 1.01 - Entry into a Material Definitive Agreement and 3.02 - Unregistered Sales of Equity Securities as referred to in Exhibit No. 10.14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
For the Years Ended
December 31,
-----------------------
2005 2004
---------- ---------
Audit Fees and Audit Related Fees $ 33,000 $ 38,151
Tax Fees $ -- $ --
Others $ -- $ --
|
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2006 UNITED COMPANIES CORPORATION
By: /s/ Robert M. Carmichael
-----------------------------------
Robert M. Carmichael
President, Chief Executive Officer,
Chief Financial Officer and
Principal Accounting Officer
|
UNITED COMPANIES CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE(S)
-------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004 F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE
YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2005 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004 F-5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-6 TO F-18
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
United Companies Corporation
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of United Companies Corporation as of December 31, 2005, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Companies Corporation as of December 31, 2005, and the results of its activities and cash flows for the years ended December 31, 2005 and 2004 in conformity with accounting principles generally accepted in the United States.
L.L. Bradford & Company, LLC
Las Vegas, Nevada
February 10, 2006
(except for Note 13, as to which the date is March 7, 2006)
UNITED COMPANIES CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
Current assets
Cash $ 30,345
Accounts receivable, net of $29,000 allowance for doubtful accounts 52,618
Inventory 428,683
Prepaid expense and other current assets 19,170
Deferred tax asset, net - current 7,597
-----------
Total current assets 538,413
Fixed assets, net 39,240
Deferred tax asset, net - non-current 16,609
Other assets, net of $54,022 accumulated amortization 15,446
-----------
Total other assets 32,055
-----------
Total assets $ 609,708
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities $ 465,807
Customer deposits 129,131
Other liabilities 50,225
Notes payable - current portion 9,967
Notes payable - related parties- current portion 31,407
Seucured convertible debentures 299,610
-----------
Total current liabilities 986,147
Long-term liabilities
Notes payable - long-term portion 13,310
Notes payable - related parties- long-term portion 650,397
-----------
Total liabilities 1,649,854
Commitments and contingencies --
Stockholders' deficit
Common stock; $0.001 par value; 250,000,000 shares authorized
136,470,677 shares issued and outstanding 136,471
Additional paid-in capital 616,489
Commitment fees related to equity line of credit (86,205)
Accumulated deficit (1,706,901)
-----------
Total stockholders' deficit (1,040,146)
-----------
Total liabilities and stockholders' deficit $ 609,708
===========
|
See Accompanying Notes to Consolidated Financial Statements.
UNITED COMPANIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------
2005 2004
------------- -------------
Net revenues $ 2,935,869 $ 2,974,377
Cost of net revenues 1,956,269 2,020,615
------------- -------------
Gross profit 979,600 953,762
Operating expenses
Research and development costs 18,730 73,280
Selling, general and administrative 980,496 1,047,790
------------- -------------
Total operating expenses 999,226 1,121,070
------------- -------------
Loss from operations (19,626) (167,308)
Other (income) expense
Other (income) expense 14,898 (87,539)
Interest expense 85,992 431,153
------------- -------------
Total other expenses 100,890 343,614
------------- -------------
Net loss before provision for income taxes (120,516) (510,922)
Provision for income taxes benefit 24,206 --
------------- -------------
Net loss $ (96,310) $ (510,922)
============= =============
Basic loss per common share $ (0.00) $ (0.00)
============= =============
Diluted loss per common share $ (0.00) $ (0.00)
============= =============
Basic and diluted weighted average common
shares outstanding 120,159,221 109,719,171
============= =============
|
See Accompanying Notes to Consolidated Financial Statements.
UNITED COMPANIES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Common Stock Additional
---------------------------- Paid-in Treasury
Shares Amount Capital Stock
------------ ------------ ----------- ------------
Balance, December 31, 2003 95,000,000 95,000 270,846 (4,800)
Issuance of common stock for acquisition
of United Companies Corporation 14,483,718 14,484 (238,807) --
Cancellation of treasury stock -- -- (4,800) 4,800
Common stock issued for loan fees related
to Standby Equity Distribution Agreement 2,416,667 2,417 287,583 --
Common stock issued for other receivable 1,726,190 1,726 205,417 --
Common stock issued for services 500,000 500 9,500 --
Beneficial conversion feature related to
convertible debentures -- -- 341,002 --
Amortization of loan fees related to Standby
Equity Distribution Agreement -- -- (58,795) --
Net loss
------------ ------------ ------------ ------------
Balance, December 31, 2004 114,126,575 114,127 811,946 --
Reclassification for change in the number of
common shares receivable related to the
issuance of common stock -- -- (165,714) --
Common stock redeemed for other receivable
and cancelled at June 15, 2005 (517,857) (518) (40,911) --
Conversion of Secured Convertible Debenture to
common stock pursuant to the Securities
Purchase Agreement dated April 4, 2004 22,861,959 22,862 52,528 --
Amortization of commitment fees related to
Standby Equity Distribution Agreement -- -- (145,000) --
Consulting expense recognized for stock
warrants issued in conjunction with the
consulting agreement effective January, 2005 -- -- 103,640 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2005 136,470,677 $ 136,471 $ 616,489 $ --
============ ============ ============ ===========
UNITED COMPANIES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Commitment fees Other
Related to Receivable
Standby Equity Related to the Total
Distribution Issuance of Accumulated Stockholders'
Agreement Common Stock Deficit Deficit
------------ ------------ ------------ ------------
Balance, December 31, 2003 -- -- (1,099,669) (738,623)
Issuance of common stock for acquisition
of United Companies Corporation -- -- -- (224,323)
Cancellation of treasury stock -- -- -- --
Common stock issued for loan fees related
to Standby Equity Distribution Agreement (290,000) -- -- --
Common stock issued for other receivable -- (207,143) -- --
Common stock issued for services -- -- -- 10,000
Beneficial conversion feature related to
convertible debentures -- -- -- 341,002
Amortization of loan fees related to Standby
Equity Distribution Agreement 58,795 -- -- --
Net loss (510,922) (510,922)
------------ ------------ ------------ ------------
Balance, December 31, 2004 (231,205) (207,143) (1,610,591) (1,122,866)
Reclassification for change in the number of
common shares receivable related to the
issuance of common stock -- 165,714 -- --
Common stock redeemed for other receivable
and cancelled at June 15, 2005 -- 41,429 -- --
Conversion of Secured Convertible Debenture to
common stock pursuant to the Securities
Purchase Agreement dated April 4, 2004 -- -- -- 75,390
Amortization of commitment fees related to
Standby Equity Distribution Agreement 145,000 -- -- --
Consulting expense recognized for stock
options issued in conjunction with the
consulting agreement effective January, 2005 -- -- -- 103,640
Net loss -- -- (96,310) (96,310)
------------ ------------ ------------ ------------
Balance, December 31, 2005 $ (86,205) $ -- $ (1,706,901) $ (1,040,146)
============ ============ ============ ============
|
See Accompanying Notes to Consolidated Financial Statements.
UNITED COMPANIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------
2005 2004
---------- ---------
Cash flows from operating activities:
Net loss $ (96,310) $(510,922)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 53,757 53,979
Stock based compensation 103,640 10,000
Change in deferred tax asset (24,206) --
Beneficial conversion feature related to convertible debenture -- 341,002
Loss on disposal of fixed assets 2,941 --
Changes in operating assets and liabilities:
Change in accounts receivable, net 11,261 (12,279)
Change in inventory (33,266) (62,078)
Change in prepaid expenses and other current assets (10,226) (8,944)
Change in other assets 8,198 (70,764)
Change in bank overdraft -- (26,299)
Change in accounts payable and accrued liabilities (89,324) (472)
Change in customer deposits 97,704 22,507
Change in billings in excess of cost and estimated
earnings on uncompleted contracts -- (5,000)
Change in other liabilities 40,225 (34,362)
--------- ---------
Net cash provided (used) by operating activities 64,394 (303,632)
Cash flows from investing activities:
Proceeds from sale of fixed assets 17,434 --
Purchase of fixed assets (5,580) (13,448)
--------- ---------
Net cash provided (used) by investing activities 11,854 (13,448)
Cash flows from financing activities:
Proceeds from issuance of secured convertible debentures -- 375,000
Proceeds from borrowings on notes payable - related parties 8,013 136,876
Principal payments on notes payable (30,642) (15,421)
Principal payments on notes payable related parties (25,602) (169,413)
Principal payments on capital lease obligations -- (7,634)
--------- ---------
Net cash (used) provided by financing activities (48,231) 319,408
--------- ---------
Net change in cash 28,017 2,328
Cash, beginning of period 2,328 --
--------- ---------
Cash, end of period $ 30,345 $ 2,328
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 63,337 $ 6,033
========= =========
Cash paid for taxes $ -- $ --
========= =========
Supplemental disclosure of non-cash financing activities
Accounts payable and accrued liabilities assumed through
acquisition of United Companies Corporation $ -- $ 224,324
========= =========
Conversion of Secured Convertible Debenture into Stock as
provided in Stock Purchase Agreement $ 75,390 $ --
========= =========
Amortization of commitment fees related to Standby Equity
Distribution Agreement $ 145,000 $ 58,795
========= =========
Common stock issued for loan fees related to Standby Equity
Distribution Agreement $ -- $ 290,000
========= =========
Common stock (redeemed) issued for other receivable $(207,143) $ 207,143
========= =========
|
See Accompanying Notes to Consolidated Financial Statements.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business - United Companies Corporation (hereinafter referred to as the "Company") designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and Nitrox Generation Systems, and scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company does business as (dba) Brownie's Third Lung, the dba name of Trebor Industries, Inc.
History - United Companies Corporation (UCC) was incorporated under the laws of Nevada on November 26, 2001, with authorized common stock of 250,000,000 shares with a par value of $0.001.
On March 23, 2004, UCC consummated an agreement to acquire all of the outstanding capital stock of Trebor Industries, Inc., dba Brownies Third Lung, in exchange for 95,000,000 shares of the Company's common stock ("UCC Transaction"). Prior to the UCC Transaction, UCC was a non-operating public shell company with no operations, nominal assets, accrued liabilities totaling $224,323 and 14,483,718 shares of common stock issued and outstanding; and Trebor Industries, Inc. dba Brownies Third Lung was a manufacturer and distributor of hookah diving, and yacht based scuba air compressor and Nitrox Generation Systems from its factory in Ft. Lauderdale, Florida. The UCC Transaction is considered to be a capital transaction in substance, rather than a business combination. Inasmuch, the UCC Transaction is equivalent to the issuance of stock by Trebor Industries, Inc. dba Brownies Third Lung for the net monetary assets of a non-operational public shell company (UCC), accompanied by a recapitalization. UCC issued 95,000,000 shares of its common stock for all of the issued and outstanding common stock of Trebor Industries, Inc. dba Brownies third Lung. The accounting for the UCC Transaction is identical to that resulting from a reverse acquisition, except goodwill or other intangible assets will not be recorded. Accordingly, these financial statements are the historical financial statements of Trebor Industries, Inc. dba Brownies Third Lung. Trebor Industries, Inc. dba Brownies Third Lung was incorporated in September 17, 1981. Therefore, these financial statements reflect activities from September 17, 1981 (Date of Inception for Trebor Industries, Inc. dba Brownies Third Lung) and forward.
Definition of fiscal year - The Company's fiscal year end is December 31.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to the 2005 financial statement amounts to conform to the 2004 financial statement presentation.
Inventory - Inventory is stated at the lower of cost or market. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company's management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
Fixed assets - Fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which is primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition - Revenues from product sales are recognized when the Company's products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. Claims are included in revenues when realization is probable and the amount can be reliably estimated.
Revenue and costs incurred for time and material projects are recognized currently as the work is performed.
Product development costs - Product development expenditures are charged to expenses as incurred.
Advertising and marketing costs - The Company recognizes advertising expenses in accordance with Statement of Position 93-7 "Reporting on Advertising Costs." Accordingly, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of communicating advertisements in the period in which the advertising space or airtime is used. Advertising and trade show expense incurred for the year ended December 31, 2005, and 2004, was $49,974, and $61,158, respectively.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
Income taxes - The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. 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.
As of December 31, 2005, the Company has available a net operating loss carryforward that will expire in 2024. The Company has established a valuation allowance for 50% of the tax benefit of the operating loss carryover due to the uncertainty regarding realization.
Comprehensive income (loss) - The Company has no components of other comprehensive income. Accordingly, net loss equals comprehensive loss for all periods.
Stock-based compensation - The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards No. 123 revised that requires that the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period the employee is required to provide service in exchange for the award.
The Company did not issue any stock, warrants or options, to employees for compensation for the year ended December 31, 2005.
Fair value of financial instruments - The carrying amounts and estimated fair values of the Company's financial instruments approximate their fair value due to the short-term nature.
Earnings (loss) per common share - Basic earnings (loss) per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings (loss) per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings (loss) per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. As a result, 113,529,323 common stock equivalent shares were excluded from the computation at December 31, 2005 since their effect was antidilutive.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
New accounting pronouncements - In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement changes the requirements for the accounting for and reporting of a voluntary change in accounting principle. The Statement requires retrospective application of prior periods' financial statement of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one of more individual periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. The Statement carries forward the without change the guidance contained in APB opinion No. 20 for reporting the correction of an error in previously issued financial statements, a change in accounting estimate, and guidance regarding justification of a change in accounting principle on the basis of preferability. The Statement is effective for all fiscal years beginning after December 31, 2005. As allowed by the Statement, the Company adopted early application in June 2005 with no significant financial impact.
In March, 2005, the FASB issued Summary of Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations - an
interpretation of FASB Statement No. 143. The Interpretation clarifies
that the term "conditional asset retirement obligation" as used in FASB
Statement No. 143, Accounting for Asset Retirement Obligations, refers to
legal obligation to perform an asset retirement activity in which the
timing and (or) method of settlement are conditional on a future event
that may or may not be within control of the entity. The Interpretation
directs that the entity is required to recognize a liability for the fair
value of the conditional asset retirement obligation if the fair value of
the liability can be reasonably estimated. The fair value of a liability
for the conditional asset retirement obligation should be recognized when
incurred - generally upon acquisition, construction, or development and
(or) through the normal operation of the asset. The Interpretation further
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation acknowledging
that in some cases this information may not be available. The
Interpretation is effective no later than the end of the fiscal years
ending after December 15, 2005 (December 31, 2005 for calendar year
enterprises). As encouraged by the FASB, the Company elected early
application of this Interpretation in the year ended December 31, 2005
without significant financial impact.
In December 2004, the FASB issued SFAS No. 123 revised, Accounting for Stock-Based Compensation. Under SFAS No. 123 revised, the Company will measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period the employee is required to provide service in exchange for the award. SFAS No. 123 revised, replaces SFAS No.123, and supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. In addition, SFAS No. 123 revised amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as financing cash inflow rather than as a reduction of taxes paid. The Company elected early adoption of SFAS No. 123 during the year ended December 31, 2004 without significant financial impact. Previously, the Company had applied APB Opinion No. 25, in accounting for stock-based compensation to employees. For stock options and warrants issued to non-employees, the Company was applying SFAS No. 123, Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value. Fair value is measured based on whichever is more reliable, the cost of the good or service, or the fair value of the equity instrument issued. SFAS No. 123 revised did not change the accounting treatment as it relates to non-employee compensation based equity awards issued.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets-Amendment of APB Opinion No. 29. This statement amends APB Opinion 29 that is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 eliminates APB No. 29's exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Commercial substance is assumed if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company elected early adoption of this statement during the year ended December 31, 2004 with no significant financial impact.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs-Amendment of ARB No. 43. The statement amends the guidance in ARB No. 43 regarding "inventory pricing" to clarify the accounting for "abnormal" amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 calls for the treatment of these costs as period costs regardless of the normal or "abnormal" nature of them. SFAS No. 151 eliminates the "so abnormal" classification provision found in ARB No. 43. The Company elected early adoption of this statement during the year ended December 31, 2004, with no significant financial impact.
In December 2003, the FASB issued Interpretation No. 46 revised , Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. The Interpretation addresses consolidation by business enterprises of variable interest entities and was effective immediately for variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities acquired before February 1, 2003. The Company adopted the Interpretation during the year ended December 31, 2004 with no significant financial impact.
2. INVENTORY
Inventory consists of the following as of December 31, 2005:
Raw materials $ 212,298
Work in process --
Finished goods 216,385
----------------
$ 428,683
================
3. FIXED ASSETS
|
Fixed assets consists of the following as of December 31, 2005:
Furniture, vehicles, and equipment $ 212,324
Leasehold improvements 7,000
----------------
219,324
Less: accumulated depreciation and amortization (180,084)
----------------
$ 39,240
================
|
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. CUSTOMER CREDIT CONCENTRATIONS
Sales to Brownie's Southport Diver's, Inc. for the year ended December 31, 2005, and 2004 represented 18.3% and 21.7%, respectively, of total Company Net revenues. Accounts receivable from Brownie's Southport Diver's Inc. at December 31, 2005 and 2004 was $10,376 and $0 , respectively. Sales to no other customer represented greater than 10% of net revenues for standard business of a re-occurring nature, for the year ended December 31, 2005 or 2004. While individual custom tankfill system sales may periodically represent a concentration of revenue, sales of this type are of a non-reoccurring nature. Brownie's Southport Diver's Inc, is owned by the brother of Robert Carmichael, the Company's Chief Executive Officer, as further discussed in Note 5 - RELATED PARTY TRANSACTIONS.
5. RELATED PARTY TRANSACTIONS
Notes payable - related parties - Notes payable - related parties consists of the following as of December 31, 2005:
Promissory note payable to the Chief Executive Officer
of the Company, unsecured, bearing interest at 10% per
annum, due in monthly principal and interest payments of
$3,924, maturing on March 1, 2010, with a balloon
payment of $431,795 due. The note will be discounted 15%
of the outstanding principal balance if it is paid in
full by April, 1 2007. $ 445,271
Promissory note payable to an entity owned by the
Company's Chief Executive Officer, unsecured, bearing
interest at 10% per annum, due in monthly principal and
interest payments of $1,802, maturing on March 1, 2010,
with a balloon payment of $198,264 due. The note will be
discounted 15% of the outstanding principal balance if
it is paid in full by April 1, 2007. 204,451
Promissory note payable due an entity owned by the
Company's Chief Executive Officer, unsecured, bearing 0%
interest per annum, due in monthly principal only
payments of $2,292, maturing on February 15, 2007. 32,082
-----------
681,804
Less amounts due within one year 31,407
-----------
Long-term portion of Notes payable - related parties $ 650,397
===========
|
As of December 31, 2005, principal payments on the Notes payable - related parties are as follows:
2006 $ 31,407
2007 8,900
2008 4,769
2009 5,268
2010 631,460
-----------
$ 681,804
===========
|
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS (continued)
Revenues - The Company sells products to two entities owned by the brother of the Company's Chief Executive Officer, Brownie's Southport Divers, Inc. and Brownie's Palm Beach Divers. Terms of sale are no more favorable than those extended to any of the Company's other customers. Combined revenue from these entities for the year ended December 31, 2005, and 2004, was $650,925 and $644,320, respectively. Combined accounts receivable related to these entities was $10,376 and $0 at December 31, 2005 and 2004, respectively.
Royalties - The Company has Non-Exclusive License Agreements with an entity in which the Company's Chief Executive Officer has an ownership interest to license product patents it owns. Based on the agreements with the entity, the Company pays royalties ranging from $1.00 to $50.00 per licensed products sold, with rates increasing 5% annually. With the same entity, the Company has a Non-Exclusive License Agreement to license a trademark of products owned by the entity. Based on the agreement, the Company will pay the entity $0.25 per licensed products sold, with rates increasing $0.05 annually.
The Company has Non-Exclusive License Agreements with an entity owned by the Company's Chief Executive Officer to license product patents it owns. Previous agreements in effect with this entity were renegotiated and New agreements were entered into effective January 1, 2005. Under the terms of the new agreements, the Company pays the other related entity $2.00 per licensed product sold, rates increasing 5% annually, with a 75% royalty fee discount period through December 31, 2005, after which time the royalty rate will return to 100%. With the same entity, the Company has an Exclusive License Agreement to license the trademark "Brownies Third Lung", "Tankfill", "Brownies Public Safety" and various other related trademarks as listed in the agreement. The one agreement replaced several earlier license agreements and was effective January 1, 2005. Based on the Agreement, the Company pays the entity 2.5% of gross revenues per quarter, with a 75% royalty fee discount period through December 31, 2005. Under the Agreement the royalty rate was to return to 100% at January 1, 2006, however, a new agreement was negotiated effective January 1, 2006, as discussed in Note 13. SUBSEQUENT EVENTS.
Total royalty expense for the above agreements for the years ended December 31, 2005 and 2004, was $20,415 and $96,888, respectively. As of December 31, 2005, the Company was in arrears on royalty payments by $17,565. This amount is included in Other liabilities on the face of the balance sheet. The related parties continue to work with the Company regarding payment and no notices of default have been issued as a result.
Lease Expense - The Company leases its facility from an entity in which the Chief Executive Officer has an ownership interest. For the year ended December 31, 2005 and 2004, lease expense was $130,602, and $130,864, respectively. As of December 31, 2005, the Company was in arrears on lease payments by $18,950. The Company is making reduced rental payments, with the intention to bring the liability current by mid 2006. The landlord continues to work with the Company under this arrangement and has not issued a notice of default as a result.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CUSTOMER DEPOSITS AND RETURN POLICY
The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit has been accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise is subject to a 20% restocking fee as stated on each sales invoice.
7. OTHER LIABILITIES
Other liabilities totaling $50,225 as of December 31, 2005, consists of $17,565 royalties due, $1,117 sales tax payable, $18,043 on-line training liability, and $13,500 related to a notice of amount due from a government agency discussed below.
On July 8, 2005, the Company received a notice of delinquency and amount due associated with a settlement the Company had with a government agency for payment of a fine. On June 28, 2005 the Company made the last payment due under the total settlement agreement of $24,000. Per the settlement agreement, if all payments were not made strictly in accordance with the payment schedule then the amount due would revert back to the original assessed amount of $37,500. No notice of default or official change in amount due was received prior to this notice request.
The notice of delinquency asserts that the amount now due by the Company is $28,133. The Company is currently in the process of investigating the assertion of the amount due as it feels there is no basis for the total assessment. The Company has requested abatement of the total additional amount shown due and is awaiting resolution. However, based on receipt of this notice, the Company recorded an other liability in the amount of $13,500 (the $37,500 original assessment less the $24,000 settlement amount paid).
Effective July 1, 2005, the Company began including on-line training certificates with all hookah units sold. The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder. The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates). The certificates have an eighteen-month redemption life after which time they expire. The eighteen-month life of the certificates begins at the time the customer purchases the unit. The Company owes the on-line training vendor the agreed upon negotiated rate for all on-line certificates redeemed payable at the time of redemption. For certificates that expire without redemption, no amount is due the on-line training vendor. The Company has no historical data with regard to the percentage of certificates that will be redeemed versus those that will expire. Therefore, until the Company accumulates historical data related to the certificate redemption ratio, it will assume that 100% of certificates issued with unit sales will be redeemed. Accordingly, at the time a unit is sold, the related on-line training liability is recorded. The same liability is reduced as certificates are redeemed and the related payments are made to the on-line training vendor.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE
Notes payable consists of the following as of December 31, 2005:
Promissory note payable secured by a vehicle of the Company having a carrying value of $9,081 at December 31, 2005, bearing interest at 10.16% per annum, due in monthly principal and interest payments of $553,
maturing on October 28, 2007. $ 11,063
Promissory note payable secured by a vehicle of the
Company having a carrying value of $12,039 at December
31, 2005, bearing no interest, due in monthly principal
and interest payments of $349, maturing on November 14,
2008. 12,214
-----------
23,277
Less amounts due within one year: 9,967
-----------
Long-term portion of Notes payable $ 13,310
===========
|
As of December 31, 2005, principal payments on the Notes payable are as follows:
2006 $ 9,967
2007 9,471
2008 3,839
-----------
$ 23,277
===========
|
The Company sold a vehicle during April 2005, and recognized a loss of $907. The promissory note payable that was secured by the vehicle sold was fully satisfied and retired as part of the transaction.
9. SECURED CONVERTIBLE DEBENTURES
On April 2, 2004, the Company issued a Secured Convertible Debenture to Cornell Capital Partners, LP in the principal amount of $250,000. The Secured Convertible Debenture is convertible into shares of the Company's common stock as a price per share that is equal to the lesser of: (i) an amount equal to 120% of the closing bid price of our common stock as of the date of the convertible debenture or (ii) an amount equal to 80% of the average of the lowest daily volume weighted average price of our common stock for the five trading days immediately preceding the conversion date. The Secured Convertible Debenture accrues interest at a rate of 5% per year and is convertible at the holder's option. The Secured Convertible Debenture has a term of 2 years. At the Company's option, the Secured Convertible Debenture may be paid in cash or converted into shares of common stock unless converted earlier by the holder. Except after an event of default, as set forth in the Secured Convertible Debenture, Cornell Capital Partners, LP is not entitled to convert such debenture for a number of shares of common stock of the Company in excess of that number of shares which, upon giving effect to the debenture if such conversion would cause the aggregate number of shares of common stock beneficially held by such holder and its affiliated to exceed 4.99% of the outstanding shares of common stock of the Company. The Company has the right to redeem with fifteen (15) business days advance notice, a portion or all of the outstanding Secured Convertible Debenture. The redemption price shall be one hundred twenty (120%) of the redeemed amount plus accrued interest. In addition, if the Company avails itself of the redemption right, the Company shall, concurrent with the redemption, issue warrants to the holder at a rate of 50,000 per $100,000 redeemed, pro-rata.
9. SECURED CONVERTIBLE DEBENTURES (continued)
The exercise price of the warrants shall be 120% of the closing bid price of common stock on the closing date. The warrants shall have "piggy-back" and demand registration rights and shall survive for two (2) years from the closing date.
On July 23, 2004, the Company issued a second Secured Convertible Debenture to Cornell Capital Partner, LP in the principal amount of $125,000. The Secured Convertible Debenture has a term of 2 years with all the same terms and conditions of the first convertible debenture issued on April 2, 2004.
Secured convertible debentures consist of the following as of December 31, 2005:
Secured convertible debenture secured by all assets of
the Company, bearing interest at 5% per annum, maturing
on April 2, 2006. $ 174,610
Secured convertible debenture secured by all assets of
the Company, bearing interest at 5% per annum, maturing
on July 28, 2006. 125,000
-----------
299,610
Less amounts due within one year: 299,610
-----------
Long-term portion of Secured convertible debentures $ -
===========
|
As of December 31, 2005, principal payments on the Secured convertible debentures are as follows:
The following table represents conversions by Cornell Capital Partners L.P. under the terms of the Secured Convertible Debentures as of the year ended December 31, 2005:
Conversion Conversion $ Number of
Conversion Notice Date Date of Conversion $ Amount Per Share Price Shares
-------------------------------------------------------------------------------------------
February 15, 2005 March 3, 2005 $10,000 0.0128 781,250
March 8, 2005 March 24, 2005 10,000 0.0082 1,219,512
June 21, 2005 July 15, 2005 10,000 0.0028 3,571,429
August 3, 2005 September 13, 2005 10,000 0.0025 4,000,000
September 19, 2005 September 19, 2005 10,000 0.0046 2,173,913
October 19,2005 October 19, 2005 10,000 0.0026 3,773,585
November 14, 2005 November 14, 2005 10,000 0.0023 4,347,826
December 7, 2005 December 7, 2005 5,390 0.0018 2,994,444
------- -----------
$75,390 22,861,959
======= ===========
|
As of December 31, 2005, loan fees associated with the Secured convertible debentures of $8,478 (net of $54,022 amortization expense) were included in other assets, totaling $15,446.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STANDBY EQUITY DISTRIBUTION AGREEMENT
On April 2, 2004, the Company entered into a Standby Equity Distribution Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity Distribution Agreement, the Company may, at its discretion, periodically issue and sell shares of its common stock for a total purchase price of $5 million. If we request advances under the Standby Equity Distribution Agreement, Cornell Capital Partners, LP will purchase shares of common stock of United for 95% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the advance notice date. Cornell Capital Partners, LP will retain 5% of each advance under the Standby Equity Distribution Agreement. The Company may not request advances in excess of a total of $5 million. The maximum of each advance is equal to $100,000 and up to a maximum of $400,000 in any thirty-day period.
In addition, the Company issued 3,625,000 shares of the Company's common stock in April 2004 for commitment fees totaling $290,000 related to the Standby Equity Distribution Agreement that was effective August 6, 2004, the date the Company's registration statement on Form SB-2 was declared effective by the Securities and Exchange Commission. The commitment fees are being amortized to additional paid in-capital over the term of the Standby Equity Distribution Agreement. The Company also issued an additional 517,857 shares of the Company's common stock in April 2004 to Cornell Capital Partners, LP in relation to the commitment fees which exceeded the agreed upon fees of $290,000. Cornell Capital Partners, LP agreed to return the shares and accordingly, the Company recorded an other receivable related to the issuance of common stock totaling $41,429. As originally stated in the Company's audited financial statements for the year ended December 31, 2004, "other receivable related to issuance of common stock" was stated as $207,143, or an overstatement of $165,714. This overstatement was a result of a different stock price used in the calculation of the $290,000 loan fee between the Company and Cornell Capital Partners, LP. This difference was resolved in the first quarter of 2005, and the Company made the reclassification from other receivable related to the issuance of common stock to additional paid -in capital for the quarter ended March 31, 2005. The reclassification is reflected on the face of the Statement of Stockholders' Deficit as "Reclassification for change in the number of shares receivable related to the issuance of common stock". On June 15, 2005, Cornell Capital Partners, LP returned the 517,857 shares as is reflected on the face of the Statement of Stockholder's Deficit as activity during the quarter ended June 30, 2005. As of December 31, 2005, the Company had not taken any draws against the Standby Equity Distribution Agreement. The Standby Equity Distribution Agreement expires on August 6, 2006.
11. COMMITMENTS AND CONTINGENCIES
Consulting Agreement - The Company entered into a two-year consulting agreement effective January 1, 2005, for management and strategic services. The consulting agreement calls for payments of $6,000 per month and provides for warrants to purchase 28,571,428 shares of the Company's common stock. The exercise price of the warrants is $.007 per share, which equaled the bid/ask price of the Company's common stock on January 1, 2005, the effective date of the agreement. The rights to exercise the warrants shall vest in four equal tranches of 7,142,857 common shares at six months, twelve months, eighteen months, and twenty-four months. The warrants expiration date is twenty-four months after the vest date. Further, the warrants have "piggy-back" registration rights and provide for either a cash or cashless exercise. The cashless exercise provision provides for a discount in the amount of shares provided at exercise based on a formula that takes into account as one of its factors the average of the closing sale price on the common stock for five trading days immediately prior to but not including the date of exercise. The Company can terminate the consulting agreement at any time for "Cause" as defined in the consulting agreement. The consultant may terminate the consulting agreement at any time for non-payment of monies due, and such condition remains uncured for a period of sixty days. If the Company terminates the consultant during the term of the agreement without "Cause", the right to exercise all warrants will vest immediately. The Company calculated the total fair value of the stock options as $198,643 using the Black-Scholes model. For the year ended December 31, 2005, the Company recognized $103,640 as compensation expense related to the warrants. As of December 31, 2005, the rights to exercise 14,285,714 had vested under the consulting agreement and no warrants had been exercised.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (continued)
Property Lease Agreement - The Company operates from a leased facility in which the Company's Chief Executive Officer has an ownership interest. The lease is non-cancelable and calls for an annual base rent of approximately $115,000 plus sales tax with a 10% base rent increase every 5 years. The lease expires in April 2013, and has three 5- year renewal options. In addition, up to $15,000 in real estate taxes is provided for in the base rental payment. Any real estate taxes over and above $15,000 are billed as additional rent to the Company and included in rent expense. For the year ended December 31, 2005, and 2004, total rent expense for the leased facility was $130,603 and $130,864, respectively. Additionally, the Company is responsible for all other operating expenses on the property such as insurance, repairs and maintenance, etc. as the lease is termed a triple net lease. The triple net expenses are recorded to the applicable expense accounts on the Company's statement of operations. As of December 31, 2005, the Company was in arrears on lease payments by $18,950. The Company is making reduced rental payments, with the intention to bring the liability current by mid 2006. The landlord continues to work with the Company under this arrangement and has not issued a notice of default as a result.
Equipment Lease Agreement - The Company leases various office equipment under either a month-to-month basis or under an operating lease. Currently there is one non-cancelable operating lease for an office copier at a rate of $313 per month plus sales tax. The lease expires in August 2009.
Future minimum lease payments required under the property lease and copier lease as of December 31, 2005, are as follows:
2006 $ 144,828
2007 125,878
2008 125,878
2009 124,552
2010 121,900
Thereafter 284,433
-----------
$ 927,469
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12. INCOME TAXES
Income tax benefit for the year ended 2005 and 2004 was $24,206 and $0, respectively. The net deferred tax asset was $24,206 and $0 for 2005 and 2004, respectively. The net deferred tax asset in 2005 is recorded as $7,597 in current assets, and $16,609 in non-current assets. At December 31, 2005, the Company had a federal operating loss carryforward of $315,057. This operating loss carryforward is available to offset future taxable income over the next nineteen years. The Company anticipates utilization of approximately $42,000 of the net operating loss carryforward for the year ended 2005. Due to a change in management's estimate of the utilization of the operating loss carryforward, the valuation allowance was decreased from $50,052 (100% of the 2004 net deferred tax asset) in 2004 to $24,206 (50% of the 2005 net deferred tax asset) in 2005. The change in the valuation allowance resulted in the net deferred tax asset of $24,206 in 2005 ($48,412 net deferred tax asset less $24,206 valuation allowance). In assessing the likelihood of the utilization of existing deferred tax assets, management has considered the historical results of operations and the current operating environment. Management believes, that future taxable income will be sufficient to utilize the net deferred tax asset of $24,206.
UNITED COMPANIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
On January 6, 2006, Cornell Capital Partners LP issued a conversion notice in the amount of $10,000, representing a conversion under the terms of the Convertible Debenture. Accordingly, based on a conversion price of $.0016, Cornell Capital Partners LP was issued 6,250,000 shares of restricted common stock on February 2, 2006.
Effective January 1, 2006, the Company renegotiated its Exclusive License Agreement to license the trademark "Brownies Third Lung", "Tankfill", "Brownies Public Safety" and various other related trademarks as listed in the Agreement. Based on the new Agreement, the Company will pay the related party entity 2.5% of gross revenues per quarter, with a 66% royalty fee discount period through December 31, 2006, at which time the royalty rate will return to 100%. In addition, the new Agreement provides for a $600 advertising credit per month against the royalties due quarterly. At December 31, 2006, whatever cumulative portion of the advertising credit the Company has not used for advertising, if any, will become due and payable to the related party entity as royalty expense.
On February 10, 2006, Cornell Capital Partners LP issued a conversion notice in the amount of $10,000, representing a conversion under the terms of the Secured Convertible Debenture. Accordingly, based on a conversion price of $.0032, Cornell Capital Partners LP was issued 3,125,000 shares of restricted common stock on March 7, 2006.
On March 1, 2006, Cornell Capital Partners LP issued a conversion notice in the amount of $10,000, representing a conversion under the terms of the Secured Convertible Debenture. Accordingly, based on a conversion price of $.0032, Cornell Capital Partners LP was issued 3,125,000 shares of restricted common stock on March 7, 2006.
EXHIBIT 31.1
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302*
I, Robert Carmichael, Chief Executive Officer, certify that:
1. I have reviewed this form 10-KSB for the fiscal year ended December 31, 2005, of United Companies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Omitted;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
By: /s/ Robert M. Carmichael
-------------------------------------
Date: March 30, 2006 Name: Robert M. Carmichael
Title: Chief Executive Officer
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*The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release Nos. 33-8618 and 34-52492 (September 22, 2005) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after July 15, 2007.
EXHIBIT 31.2
OFFICER'S CERTIFICATE
PURSUANT TO SECTION 302*
I, Robert Carmichael, Chief Financial Officer, certify that:
1. I have reviewed this form 10-KSB for the fiscal year ended December 31, 2005, of United Companies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Omitted;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
By: /s/ Robert M. Carmichael
-------------------------------------
Date: March 30, 2006 Name: Robert M. Carmichael
Title: Chief Financial Officer
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*The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release Nos. 33-8618 and 34-52492 (September 22, 2005) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after July 15, 2007.
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United Companies Corporation (the "Company") on Form 10-KSB for the fiscal year ended December 31, 2005 as filed with the United States Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
By: /s/ Robert M. Carmichael
-------------------------------------
Date: March 30, 2006 Name: Robert M. Carmichael
Title: Chief Executive Officer
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A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to United Companies Corporation and will be retained by United Companies Corporation and furnished to the United States Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United Companies Corporation (the "Company") on Form 10-KSB for the fiscal year ended December 31, 2005 as filed with the United States Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
By: /s/ Robert M. Carmichael
-------------------------------------
Date: March 30, 2006 Name: Robert M. Carmichael
Title: Chief Financial Officer
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A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to United Companies Corporation and will be retained by United Companies Corporation and furnished to the United States Securities and Exchange Commission or its staff upon request.