10QSB 1 v08455.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (MARK ONE) |X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 2004 |_| 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 ------ ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 940 N.W. 1ST STREET, FORT LAUDERDALE, FLORIDA 33311 --------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (954) 462-5570 -------------- (Issuer's Telephone Number, Including Area Code) AVID SPORTSWEAR & GOLF CORP. (Former Name) 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 |_| There were 114,126,575 shares of common stock outstanding as of November 1, 2004. ITEM 1. FINANCIAL STATEMENTS FINANCIAL INFORMATION UNITED COMPANIES CORPORATION CONDENSED BALANCE SHEET SEPTEMBER 30, 2004 (UNAUDITED)
ASSETS Current assets Cash ............................................................ $ 26,572 Accounts receivable, net ........................................ 38,664 Inventory ....................................................... 388,150 Prepaid Expense and Other Current Assets ........................ 45,089 ----------- Total current assets .................................. 498,475 Fixed assets, net ........................................................ 83,119 Other assets, net ........................................................ 64,905 ----------- Total assets ............................................................. $ 646,499 =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable and accrued liabilities ........................ $ 550,737 Due to related parties .......................................... 712,893 Customer deposits ............................................... 38,300 Other liabilities ............................................... 45,665 Loans payable - current portion ................................. 14,330 ----------- Total current liabilities ............................. 1,361,925 Long-term liabilities Loans payable - long-term portion ............................... 43,960 Convertible debenture ........................................... 375,000 ----------- Total liabilities ........................................................ 1,780,885 Commitments and contingencies ............................................ -- Stockholders' deficit Common stock; $0.001 par value; 250,000,000 shares authorized 114,126,575 shares issued and outstanding ..................... 114,127 Additional paid-in capital ...................................... 870,741 Loan fees related to equity line of credit ...................... (290,000) Other receivable related to the issuance of common stock ........ (207,143) Accumulated deficit ............................................. (1,622,111) ----------- Total stockholders' deficit ........................... (1,134,386) ----------- Total liabilities and stockholders' deficit .............................. $ 646,499 ===========
See Accompanying Notes to Financial Statements UNITED COMPANIES CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30 Nine Months Ended September 30 ---------------------------------------------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Revenues ................................ $ 1,097,981 $ 964,692 $ 2,270,346 $ 1,908,623 Cost of revenues ........................ 666,981 610,970 1,543,344 1,420,325 ------------- ------------- ------------- ------------- Gross profit .................... 431,000 353,722 727,002 488,298 Operating expenses Research and development costs ... 14,837 14,250 45,006 42,643 Selling, general and administrative . 250,084 217,090 802,713 482,874 ------------- ------------- ------------- ------------- Total operating expenses 264,921 231,340 847,719 525,517 ------------- ------------ ------------- ------------- Gain (loss) from operations ..... 166,079 122,382 (120,717) (37,219) Other (income) expense Other (income) expense .......... (5,062) 20 (4,677) (1,158) Interest expense ................ 79,059 25,392 406,402 56,209 ------------- ------------- ------------- ------------- Total other expenses ........ 73,997 25,412 401,725 55,051 ------------- ------------- ------------- ------------- Net income (loss) before provision for .. 92,082 96,970 (522,442) (92,270) income taxes Provision for income taxes .............. -- -- -- -- ------------- ------------- ------------- ------------- Net income (loss) ....................... $ 92,082 $ 96,970 $ (522,442) $ (92,270) ============= ============= ============= ============= Basic loss per common share ............. $ 0.00 $ 0.00 $ (0.00) $ (0.00) ============= ============= ============= ============= Diluted loss per common share ........... $ 0.00 $ 0.00 $ (0.00) $ (0.00) ============= ============= ============= ============= Basic and diluted weighted average common shares outstanding .............. $ 114,126,575 $ 95,000,000 $ 108,150,739 $ 95,000,000 ============= ============= ============= =============
See Accompanying Notes to Financial Statements UNITED COMPANIES CORPORATION CONDENSED STATEMENT OF STOCKHOLDERS' DEFECIT
Common Stock Additional Treasury ------------ Shares Amount Paid-in 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 Net loss January 1 to March 31, 2003 ....... -- -- -- -- ----------- ----------- ----------- ----------- Balance, March 31, 2004 (Unaudited) ........ 109,483,718 109,484 27,239 -- 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 debenture ................... -- -- 285,714 -- Net Loss April 1 to June 30, 2003 .......... -- -- -- -- ----------- ----------- ----------- ----------- Balance, June 30, 2004 (Unaudited) ......... 114,126,575 114,127 815,453 -- Beneficial conversion feature related to convertible debenture ................... -- -- 55,288 -- Net Revenue July 1 to September 30, 2004 ... -- -- -- -- ----------- ----------- ----------- ----------- Balance September 30, 2004 (Unuadited)...... 114,126,575 $ 114,127 $ 870,741 $ -- =========== =========== =========== =========== Other Loan Fees Receivable Related to Related to the Total Equity Line Issuance of Accumulated Stockholders' of Credit 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 ............. -- -- -- -- Net loss January 1 to March 31, 2003 ....... -- -- (186,102) (186,102) ----------- ----------- ----------- ----------- Balance, March 31, 2004 (Unaudited) ........ -- -- (1,285,771) (1,149,048) 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 debenture ................... -- -- -- 285,714 Net Loss April 1 to June 30, 2003 .......... -- -- (428,422) (428,422) ----------- ----------- ----------- ----------- Balance, June 30, 2004 (Unaudited) ......... (290,000) (207,143) (1,714,193) (1,281,756) Beneficial conversion feature related to convertible debenture ................... -- -- -- 55,288 Net Revenue July 1 to September 30, 2004 ... -- -- 92,082 92,082 ----------- ----------- ----------- ----------- Balance September 30, 2004 (Unaudited)...... $ (290,000) $ (207,143) $(1,622,111) $(1,134,386) =========== =========== =========== ===========
See Accompanying Notes to Financial Statements UNITED COMPANIES CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, ------------------------------- 2004 2003 ------------- --------------- Cash flows from operating activities: Net loss ....................................................... $(522,442) $ (92,270) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and Amortization ......................... 37,390 25,596 Stock based compensation .............................. 10,000 -- Beneficial conversion feature related to convertible debenture 341,002 -- Changes in operating assets and liabilities: Change in accounts receivable, net .................... 12,936 (136,650) Change in inventory ................................... (54,811) (5,118) Change in prepaid expenses and other current assets ... (45,089) (5,000) Change in other assets ................................ (70,763) -- Change in bank overdraft .............................. (26,299) (23,163) Change in accounts payable and accrued liabilities .... (4,866) (1,051) Change in customer deposits ........................... 29,380 (49,731) Change in billings in excess of cost and estimated earnings on uncompleted contracts ............ (5,000) 33,188 Change in other liabilities ........................... 1,303 (29,718) --------- --------- Net cash provided by operating activities .... (297,259) (283,917) Cash flows from investing activities: Change in due from related party Purchase of fixed assets ....................................... (13,448) (1,952) --------- --------- Net cash used by investing activities ........ (13,448) (1,952) Cash flows from financing activities: Change in due to related parties ............................... (19,037) 488,125 Proceeds from borrowings on loans payable ...................... 375,000 -- Principal payments on loans payable ............................ (11,050) (150,471) Principal payments on capital lease obligations ................ (7,634) (10,816) --------- --------- Net cash provided by financing activities .... 337,279 326,838 --------- --------- Net change in cash ...................................................... 26,572 40,969 Cash, beginning of period ............................................... -- -- Cash, end of period ..................................................... $ 26,572 $ 40,969 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest ......................................... $ 3,857 $ 21,070 ========= ========= Supplemental disclosure of non-cash financing activities Accounts payable and accrued liabilties assumed through acquistion of United Companies Corporation ............... $ 224,324 $ -- ========= ========= Common stock issued for loan fees related to Standby Equity Distribution Debenture ................................ $ 290,000 $ -- ========= ========= Common stock issued for other receivable ....................... $ 207,143 $ -- ========= =========
See Accompanying Notes to Financial Statements UNITED COMPANIES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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, and yacht based scuba air compressor and Nitrox Generation Systems from its factory in Ft. Lauderdale, Florida. The Company also designs, develops and produces a line of scuba and water safety products targeted at the public safety diver and recreational boating markets. 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 $224,324 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 factor 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. INVENTORY - Inventory is stated at the lower of cost or market. Cost is principally determined by using the average cost 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. UNITED COMPANIES CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 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. 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 nine months ended September 30, 2004 and 2003, were approximately $43,552 and $20,498, 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 September 2004, the Company has available net operating loss carryforwards that will expire in various periods through 2024. Such losses may not be fully deductible due to the significant amounts of non-cash service costs and the change in ownership rules under Section 382 of the Internal Revenue Code. The Company has established a valuation allowance for the full tax benefit of the operating loss carryovers due to the uncertainty regarding realization. UNITED COMPANIES CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (CONTINUED) 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 applies Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations, in accounting for stock options issued to employees. Under APB No. 25, employee compensation cost is recognized when estimated fair value of the underlying stock on date of the grant exceeds exercise price of the stock option. For stock options and warrants issued to non-employees, the Company applies Statements of Financial Accounting Standards ("SFAS") No. 123 Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value of stock options at the grant date using the Black-Scholes option pricing model. The Company issued no stock, neither granted warrants nor options, to employees for compensation for the nine months ended September 30, 2004. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends the transition and disclosure provisions of SFAS No. 123. The Company is currently evaluating SFAS No. 148 to determine if it will adopt SFAS No. 123 to account for employee stock options using the fair value method and, if so, when to begin transition to that method. 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. NEW ACCOUNTING PRONOUNCEMENTS - Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. It is 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 impact of adoption of this statement is not expected to be significant. SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, amends and clarifies accounting for derivative instruments under SFAS No. 133. It is effective for contracts entered into after June 30, 2003. The impact of adoption of this statement is not expected to be significant. SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The impact of adoption of this statement is not expected to be significant. UNITED COMPANIES CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 2. INVENTORY Inventory consists of the following as of September 30, 2004: Raw materials $208,167 Work in process -- Finished goods 179,983 -------- $388,150 ======== 3. FIXED ASSETS Fixed assets consist of the following as of June 30, 2004: Furniture and equipment $235,639 Leasehold Improvements 7,000 -------- 242,639 Less: accumulated depreciation and amortization 159,520 -------- $ 83,119 ======== 4. RELATED PARTY TRANSACTIONS
Due to related parties - Due to related parties consist of the following as of September 30, 2004: Loan from the Company's Chief Executive Officer, unsecured, bearing interest at 10% per annum, and due on demand $510,091 Loan from an entity owned by the Company's Chief Executive Officer, unsecured, bearing interest at 10% per annum, and due on demand 196,952 Loan from an entity owned by the Company's Chief Executive Officer, unsecured, bearing interest at 10% per annum, and due on demand 458 Loan from the Company's Chief Executive Officer, unsecured, bearing interest at 10% per annum, principal- only payments of $5,000 per month, and due on demand 5,392 -------- $712,893 ========
INTEREST EXPENSE ON RELATED PARTY LOANS - The Company accrues interest monthly on the average outstanding balances of the related party loans at a rate of 10% per annum. The interest due is added to the respective related party loan accounts. Interest expense on related party loans for the nine months ended September 30, 2004 and 2003 approximated $55,190 and $36,988, respectively. REVENUES - The Company sells products to an entity owned by the Company's Chief Executive Officer. Revenues earned from the entity for the nine months ended September, 2004 and 2003 were approximately $497,443 and $259,245, respectively. UNITED COMPANIES CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 4. RELATED PARTY TRANSACTIONS (CONTINUED) ROYALTIES- During January 2004 the Company entered into various Non-Exclusive License Agreements with entities owned by the Company's Chief Executive Officer to license patents of products owned by the entities. Based on the Agreements, the Company will pay the entities from $1.00 to $50.00 per licensed products sold, with rates increasing 5% annually. During January 2004, the Company entered into a Exclusive License Agreement with an entity owned by the Company's Chief Executive Officer to license the trademark "Brownies Third Lung". Under the Agreement the Company is required to pay the entity the greater of $15,000 per quarter or 2.5% of gross revenues. During January 2004, the Company entered into two Exclusive License Agreement with an entity owned by the Company's Chief Executive Officer to license the various Tankfill and Public Safety trademarks. Under the Agreements the Company is required to pay the entity 1% of gross revenues for total related licensed products sold. During January 2004 the Company entered into a Non-Exclusive License Agreements with an entity owned by the Company's Chief Executive Officer to license a trademark of products owned by the entity. Based on the Agreements, the Company will pay the entity $0.25 per licensed products sold, with rates increasing $0.05 annually. For the nine months ended September 30, 2004, total royalty expense for the above agreements approximated $76,010. LEASE EXPENSE - The Company leases its facility from an entity in which the Chief Executive Officer has an ownership interest. Lease expense for the nine months ended September 30, 2004 and 2003 was approximately $92,720 and $80,472, respectively. 5. BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Billings in excess of costs and estimated earnings on uncompleted contracts consist of the following as of September 30, 2004: Costs incurred on uncompleted contracts $147,241 Estimated earnings 42,567 -------- 189,808 Less: billings to date 189,808 -------- Billings in excess of cost and estimated earnings on uncompleted contracts $ -- ======== 6. OTHER LIABILITIES Other liabilities totaling $45,665 as of September 30, 2004 consists of $10,000 remaining on a settlement with a government agency for payment of a fine, and $35,665 past due on payment of royalty expense. Under the government settlement agreement, the Company is required to make monthly payments ranging from $1,000 to $1,500 per month. The government liability is unsecured and payments continue until paid in full. The Company owned by the Chief Executive Officer that is owed the royalty payments, has granted the Company a default waiver and extension on payment until December 5, 2004. UNITED COMPANIES CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7. LOANS PAYABLE
Loans payable consists of the following as of September 30, 2004: Promissory note payable secured by a vehicle of the Company, bearing interest at 10.16%, due in monthly principal and interest payments of $553, due August 2007 $17,504 Promissory note payable secured by a vehicle of the Company, bearing no interest, due in monthly principal and interest payments of $349, which matures November 2008 17,449 Promissory note payable secured by a vehicle of the Company, bearing interest at 7.47%, due in monthly principal and interest payments of $513, which matures October 2008 21,966 Promissory note payable to an individual, unsecured, bearing no interest, payable in monthly installments of $500, which matured January 2003. As of December 31, 2002, the Company was in default, subsequently the Company began making variable payments in accordance with ongoing negotiations with the individual during 2004 1,371 ------- 58,290 Less amounts due within one year: 14,330 ------- Long-term portion of loan payable $43,946 =======
As of September 30, 2004, principal payments on the notes payable are as follows:
September, 2004 through December 31, 2004 $ 4,778 2005 14,197 2006 15,122 2007 15,021 2008 9,172 ------- $58,290 =======
UNITED COMPANIES CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 8. SECURED CONVERTIBLE DEBENTURE On April 2, 2004, the Company issued a Secured Convertible Debenture to Cornell Capital Partners 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 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 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 of our assets. At the Company'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 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. We have the right to redeem with fifteen (15) business days advance notice, a portion or all of the outstanding convertible debenture. The redemption price shall be one hundred twenty (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 July 23, 2004, the Company issued a second secured convertible debenture to Cornell Capital Partner, LP in the principal amount of $125,000. The 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. The Company recorded the estimated value of the conversion feature on the debentures issued April 2, 2004 and July 23, 2004 as interest expense totaling $285,714, and $55,288, respectively. Additionally, upon closing of the first and second debenture, the Company paid $38,542, and $11,198, (net of amortization expense of $11,458 and $1,302) in loan fees, respectively which were capitalized and reflected as part of other assets totaling $64,905 and will be expensed over the life of the debentures using the straight-line method. 9. STANDBY EQUITY DISTRIBUTION AGREEMENT On April 2, 2004, the Company entered into a Standby Equity Distribution Agreement with Cornell Capital Partners. 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 any thirty-day period. In addition, the Company issued 2,416,667 shares of the Company's common stock in April 2004 for loan fees totaling $290,000 related to the Standby Equity Distribution Agreement beginning with the effective date which begins when the filed registration statement Form SB-2 is declared effective. The Company also issued an additional 1,726,190 shares of the Company's common stock in April 2004 to Cornell Capital in relation to the loan fee which exceeded the agreed upon fee of $290,000. Cornell Capital has agreed to return the shares and accordingly the Company recorded an other receivable related to the issuance of common stock totaling $207,143. UNITED COMPANIES CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 10. COMMON STOCK REGISTRATION On July 16, 2004, the Company filed a registration statement on Form SB-2 registering 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 became effective on August 9, 2004. 11. COMMITMENTS AND CONTINGENCIES 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. For the nine months ended September 30, 2004 and 2003, total rent expense for the leased facilities approximated $92,770 and $80,472, respectively. EQUIPMENT LEASE AGREEMENT - The Company leases various office equipment under either a month to month basis or operating lease. Currently there is only one non-cancelable operating lease for such equipment. It is for a copier at a rate of $312.76 per month plus sales tax. Future minimum lease payments required under such operating leases as of October 1, 2004, are as follows: October 1 through December 31, 2004 $ 29,688 2005 122,506 2006 122,506 2007 122,506 2008 122,506 Thereafter 559,586 ---------- $1,079,298 ========== ITEM 2. MANAGEMENT'S PLAN OF OPERATION AND DISCUSSION AND ANALYSIS INTRODUCTORY STATEMENTS 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. OVERVIEW United Companies Corporation, 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, 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. Trebor does business under the name "Brownie's Third Lung." Brownie's designs, tests, manufactures and distributes recreational hookah diving, and yacht based SCUBA air compressor and Nitrox Generation Systems. Brownie's also designs, develops and produces a line of SCUBA and water safety products targeted at the public safety diver and recreational boating markets. Brownie's sells most of its products from its factory in Fort Lauderdale, Florida. Brownie's is divided into three main product lines: BROWNIE'S THIRD LUNG, BROWNIE'S TANKFILL, AND BROWNIE'S PUBLIC SAFETY. BROWNIE'S THIRD LUNG, the consistent revenue leader for Brownie's, produces a line 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. A web-based training methodology is currently being developed to allow the consumer to initiate the required training for use of the system on their own schedule. It is anticipated that the final phase of the training will still be completed through traditional dive retailers and instructors, but the system will be sold to the non-diving public. BROWNIE'S TANKFILL also generates a significant portion of Brownie'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. Our goal is to attempt to reach owners of large vessels through OEM relationships. BROWNIE'S PUBLIC SAFETY 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. We are increasing our marketing efforts in the current year to raise awareness of the products we offer. 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. 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. 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. FINANCIAL PERFORMANCE United has historically lost money. For the three months ended September 30, 2004, United had net income of $92,082. For the nine months ended September 30,2004 United recorded a net loss of $522,442. United's results of operations includes United's wholly-owned subsidiary Trebor Industries, Inc. acquired by a share exchange transaction on March 23, 2004. United's independent auditors have noted that United does not have significant cash or other material assets to cover its operating costs and to continue as a going concern. Accordingly, United will experience significant liquidity and cash flow problems if it is not able to raise additional capital as needed and on acceptable terms. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004, AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003 The following discussion of United's results of operations compares United's operations activities, which includes the results of operations for United's wholly owned subsidiary Trebor Industries, Inc., d/b/a Brownies Third Lung. The comparable figures are the results of operation of Trebor Industries, Inc., as United had no operation for such period. NET REVENUES. For the three months ended September 30, 2004, we had net revenues of $1,097,981 as compared to net revenues of $964,692 for the comparable period in 2003, an increase of $133,289 or 13.82%. This increase is attributable to an overall increase in hookah system and tank fill system sales in the third quarter of 2003, with the largest increase in July 2004. The primary increase is attributable to a custom tank fill sale in July 2004 that exceeded $300,000. The increase was diminished later in the quarter by a sales decline attributed to the effect of the three hurricanes that hit the coast of Florida during that time period. COST OF REVENUES. For the three months ended September 30, 2004, we had cost of revenues of $666,981, as compared to cost of revenues of $610,970 for the comparable period in 2003, an increase of $56,011 or 9.17%. This increase is primarily attributable to the net of a decrease in material costs of components used in the assembly of our hookah and tank fill systems, an increase in material costs as a result of higher quantity sales in the third quarter of 2004, an increase in allocated overhead, and an increase in direct labor. GROSS PROFIT. For the three months ended September 30, 2004, we had a gross profit of $431,000 as compared to a gross profit of $353,722 for the comparable period in 2003, an increase of $77,278 or 21.85%. This is primarily attributable to a decrease in material costs of components used in the assembly of our hookah and tank fill systems and an increase in sales in the third quarter of 2004. OPERATING EXPENSES. For the three months ended September 30, 2004, we had operating expenses of $264,921 as compared to operating expenses of $231,340 for the comparable period in 2003, an increase of $33,581 or 14.52%. This increase was primarily attributable to increased selling and administrative salaries, consulting fees, legal fees and accounting fees. The increased costs are mainly attributable to the increased costs associated with being a public, reporting entity (comparative Trebor 2003 amounts are for a non-public entity). INTEREST EXPENSE. For the three months ended September 30, 2004, we had interest expense of $79,059, as compared to interest expense of $25,392 for the comparable period in 2003, an increase of $53,667 or 211.35%. This net increase is primarily a result of the $55,288 increase due to the interest recorded by the Company on the estimated value of the conversion feature of the second secured convertible debenture issued on July 23, 2004, an approximate $5,000 decrease in interest resulting from interest recorded and paid in the 3rd quarter 2003 on a note that matured, an approximate $5,000 increase related to the daily interest accruing on the two convertible debentures held in the 3rd quarter of 2004 that did not exist in 2003, and a decrease of $2,135 from a nonrecurring interest payment made to a governmental agency in the third quarter of 2003 and not in 2004. NET PROFIT. For the three months ended September 30, 2004, we had a net profit of $92,082, as compared to a net profit of $96,970 for the comparable period in 2003, a decrease of $4,888 or 5.04%. This decrease is primarily the result of a net increase in gross profit of $77,278 reduced by the increase in interest expense of $55,288 as a result of recognizing the estimated conversion feature on the secured convertible debenture issued July 23, 2004, further reduced by an increase in selling, general and administrative expenses. The increased selling, general and administrative expenses are primarily in the area of selling and administrative salaries, consulting fees, legal fees and accounting fees. These increased costs are mainly attributable to the increased costs associated with being a public, reporting entity (comparative Trebor 2003 amounts are for a non-public entity). RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004, AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 The following discussion of United's results of operations compares United's operations activities, which includes the results of operations for United's wholly owned subsidiary Trebor Industries, Inc., d/b/a Brownies Third Lung. The comparable figures are the results of operation of Trebor Industries, Inc., as United had no operation for such period. NET REVENUES. For the nine months ended September 30, 2004, we had net revenues of $2,270,346, as compared to net revenues of $1,908,623 for the comparable period in 2003, an increase of $361,723 or 18.95%. This increase is attributable to an increase in hookah system and tank fill system sales in the second and third quarters of 2004. The Company attributes the sales increase in the second quarter of 2004 to stepped up marketing and sales efforts to promote preseason sales. The primary increase in the third quarter of 2004 is attributable to a custom tank fill sale in July 2004 that exceeded $300,000. The increase was diminished later in the third quarter by a sales decline attributed to the effect of the three hurricanes that hit the coast of Florida during that time period. COST OF REVENUES. For the nine months ended September 30, 2004, we had cost of revenues of $1,543,344 as compared to cost of revenues of $1,420,325 for the comparable period in 2003, an increase of $123,019 or 8.66%. This increase is primarily attributable to the net of a decrease in material costs of components used in the assembly of our hookah and tank fill systems, an increase in material costs as a result of higher quantity sales in the second quarter of 2004, an increase in overhead, and an increase in direct labor. GROSS PROFIT. For the nine months ended September 30, 2004, we had gross profit of $727,002, as compared to gross profit of $488,298 for the comparable period in 2003, an increase of $238,704 or 48.88%. This is primarily attributable to a decrease in material costs of components used in the assembly of our hookah and tank fill systems. OPERATING EXPENSES. For the nine months ended September 30, 2004, we had operating expenses of $847,719, as compared to operating expenses of $525,517 for the comparable period in 2003, an increase of $322,202 or 61.31%. This increase was primarily attributable to increased selling and administrative salaries, consulting fees, legal fees and accounting fees. The increased costs were incurred mainly in conjunction with the share exchange transaction between United and Trebor Industries, Inc consummated on March 23, 2004, a secured convertible debenture transaction entered into on April 2, 2004, a Standby Equity Distribution Agreement entered into on April 2, 2004, newly ongoing costs associated with now being a public, reporting entity (comparative Trebor 2003 amounts are for a non-public entity), and the filing of a Registration Statement on Form SB-2 with the United States Securities and Exchange Commission on July 16, 2004. INTEREST EXPENSE. For the nine months ended September 30, 2004, we had interest expense of $406,402, as compared to interest expense of $56,209 for the comparable period in 2003, an increase of $350,193 or 623.02%. This increase is primarily attributable to recording approximately $340,000 in interest for the intrinsic value of the conversion feature of the two debentures recorded in 2004, $285,714 and $55,288 recorded in the second and third quarters, respectively. The remaining difference is a net of an increase in interest due to payments being made on new vehicles purchased toward the end of 2003, decrease due to interest paid to a governmental agency in 2003 not reoccurring in 2004, and an increase in interest from interest accruing on the two convertible debentures issued in 2004. NET LOSS. For the nine months ended September 30, 2004, we had a net loss of $522,442, as compared to a net loss of $92,270 for the comparable period in 2003, an increase of $430,172 or 466.21%. This increase is predominantly attributable to the increase in interest expense of $350,193. The remaining increase is attributable to the increased operating expenses resulting from the share exchange transaction between United and Trebor Industries, Inc consummated on March 23, 2004, a Secured Convertible Debenture issued on April 2, 2004, a Standby Equity Distribution Agreement entered into on April 2, 2004, newly ongoing costs associated with now being a public, reporting entity (comparative Trebor 2003 amounts are for a non-public entity), and the filing of a Registration Statement on Form SB-2 with the United States Securities and Exchange Commission on July 16, 2004. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2004, the Company had cash and current assets of $498,475. As of September 30, 2004, we had current liabilities of $1,361,925, consisting of accounts payable and accrued liabilities $550,737, due to related parties of $712,893, customer deposits of $38,300, other liabilities of $45,665 and loans payable-current portion of $14,330. As of September 30, 2004, we had a working capital deficit of $863,450. Historically our revenues increase substantially in the second and third quarters of the year, but it currently appears that external financing will be necessary to fund our operations for the foreseeable future. In the absence of outside financing, we believe that we have sufficient cash, receivable collections and projected sales to operate for approximately 6 months. This projection is based on estimated sales. 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 9, 2004, the SB-2 registration became effective, thus allowing us access under the credit facility. To-date the Company has not taken any draws against the Equity Line. As of April 2, 2004, we issued a Secured Convertible Debenture to Cornell Capital Partners 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 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 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 of our assets. 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 which 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 occur, 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. We have a history of losses. We have incurred a cumulative operating loss since inception and had an accumulated deficit of $1,622,111 as of September 30, 2004. For the three and nine month periods ended September 30, 2004, we had net income of $92,082 and a net loss of $522,422, respectively. Brownie's incurred a net loss of $187,609 for the year ended December 31, 2003 and had net income of $2,747 for the year ended December 31, 2002. We cannot predict the amount of revenues, if any, we may generate as a result of our acquisitions of Trebor Industries. Consequently, we will in all likelihood, have to rely on external financing for much of our capital requirements. Future losses are likely to continue unless we successfully implement our revised business plan. Our ability to continue as a going concern will be dependent upon our ability to draw down on our Standby Equity Distribution Agreement that we have established with Cornell Capital Partners. 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 HAVE BEEN SUBJECT TO A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the years ended December 31, 2003 and December 31, 2002, relative to our ability to continue as a going concern. Our ability to obtain additional funding will determine our ability to continue as a going concern. Accordingly, there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS As of September 30, 2004, we had $26,572 of cash on hand and our total current assets were $498,475. Our current liabilities were $1,361,925 as of September 30, 2004. We will 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 November 1, 2004, to achieve our sales growth plan, we estimate that we will require $2,500,000 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 SEPTEMBER 30, 2004 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES We had a working capital deficit of $863,450 at September 30, 2004, which means that our current liabilities as of that date exceeded our current assets by $863,450. 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 September 30, 2004 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 $375,000 issued to Cornell Capital Partners are secured by all of our assets. As a result, if we default under the terms of these secured convertible debentures, Cornell Capital Partners 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 fund our operations. Our financing needs are expected to be provided, in large 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 $0.02, we would have to issue to Cornell Capital Partners 263,157,895 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, which was declared effective August 9, 2004, 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 November 1, 2004, we had 114,126,575 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 or cease our business operations. 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. OUR FAILURE TO OBTAIN INTELLECTUAL PROPERTY PROTECTION AND ENFORCE OUR RIGHTS 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 Licensor, a related party 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 the products in the Brownie's Third Lung and Brownie's Tank Fill lines depend 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. FUTURE ACQUISITIONS MAY DISRUPT OUR BUSINESS AND DEPLETE OUR FINANCIAL RESOURCES Any future acquisitions we make could disrupt our business and seriously harm our financial condition. We intend to pursue the acquisition of other companies, assets and product lines that either complement or expand our existing business. Acquisitions involve a number of special risks, including diversion of management's attention to the assimilation of the operations and personnel of the acquired business, potential adverse short-term effects on operating results and amortization of acquired intangible assets. Moreover, there can be no assurance that we will find attractive acquisition candidates, that acquisitions can be consummated on acceptable terms or that any acquired companies can be integrated successfully into our operations. At this time we are not currently engaged in any negotiations concerning acquisition which would be material to our business. 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. OUR STANDBY EQUITY DISTRIBUTION AGREEMENT COULD HAVE AN ADVERSE EFFECT ON OUR ABILITY TO MAKE ACQUISITIONS WITH OUR COMMON STOCK We cannot predict the actual number of shares of common stock that will be issued pursuant to our Standby Equity Distribution Agreement, in part, because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of advances we intend to draw. It may be necessary for our shareholders to approve an increase in our authorized common stock for us to register additional shares of common stock in order to have sufficient authorized shares available to make acquisitions using our common stock. As we issue shares of common stock pursuant to the Standby Equity Distribution Agreement, we may not have sufficient shares of our common stock available to successfully attract and consummate future acquisitions. 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. We carry product liability insurance with the limits $1,000,000 per occurrence and $2,000,000 in the aggregate. 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 3. CONTROLS AND PROCEDURES (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer/Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives. The Company's Principal Executive Officer/Principal Accounting Officer has concluded that the Company's disclosure controls and procedures are, in fact, effective at this reasonable assurance level as of the of period covered. (B) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING In connection with the evaluation of the Company's internal controls during the Company's last fiscal quarter, the Company's Principal Executive Officer/Principal Financial Officer has determined that there are no changes to the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, the Company's internal controls over financial reporting. PART II ITEM 1. LEGAL PROCEEDINGS The following legal proceedings pertain to Trebor Industries, Inc., which became a wholly-owned subsidiary on March 23, 2004 pursuant to the Share Exchange Agreement among United, Trebor Industries, Inc. and Robert Carmichael: 1. Case No.: 04 CV 3546 (RJH)(DF): Ocean Managmenet Systems, Inc.., Plaintiff, v. Trebor Industries, Inc. d/b/a Halcyon; Halcyon Manufacturing Inc.; Global Underwater Explorers, Inc.; Jarrod Jablonski and Robert Carmichael, Defendants. This lawsuit alleges that an action by Halcyon violates a settlement agreement between Trebor Industries, Inc. and Ocean Management Systems, Inc. As Halcyon and Trebor Industries, Inc. are separate companies with independent management, it is the opinion of Trebor that this action does not pertain to them. United plans to actively seek dismissal from this case. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) On March 23, 2004, United 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 Partners, L.P. as a commitment fee pursuant to the Standby Equity Distribution Agreement, dated April 2, 2004, by and between United and Cornell Capital Partners. 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. As of April 2, 2004, we issued a Secured Convertible Debenture to Cornell Capital Partners 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 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 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 two (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 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 with 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 July 23, 2004, United issued a second Secured Convertible Debenture for the term of two (2) years in the principal amount of $125,000. The terms and conditions of the second debenture are the same as those for the Secured Convertible Debenture in the principal amount of $250,000 issued to Cornell Capital Partners on April 2, 2004 as described above. On April 14, 2004, United issued 500,000 shares to Earl Ingarfield in connection with a consulting agreement dated January 15, 2004. The Company recorded this as a consulting fee in the amount of $10,000. 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. (d) None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS 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 EXHIBIT NO. DESCRIPTION LOCATION ----------- ---------------------------------------------- --------------------------------------------------------- 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 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
(B) REPORTS ON FORM 8-K. None. 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: November 12, 2004 UNITED COMPANIES CORPORATION By: /S/ Robert M. Carmichael ------------------------------------------- Robert M. Carmichael President, Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer