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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment #3
to
FORM 10-SB
REGISTRATION OF SECURITIES OF SMALL ISSUERS
UNDER THE 1934 ACT
KENWICK INDUSTRIES, INC.
(Name of Small Business Issuer in its Charter)
FLORIDA 65-0596319
(State of (IRS Employer
incorporation) Identification No.)
KENWICK INDUSTRIES, INC.
660 LINTON BOULEVARD, SUITE 202
DELRAY BEACH, FLORIDA 33445
(Address of Principal Place of Business)
(561) 278-6090
(Issuer's Telephone Number)
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT
Common Stock, par value $0.01 per share
(Title of class)
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TABLE OF CONTENTS
Description of Business ................................................. 4
Management Discussion and Analysis of Financial Condition ............... 10
Description of Property ................................................. 18
Security Ownership of Certain Beneficial Owners and Management .......... 18
Directors, Executive Officers, Promoters and Control Persons ............ 21
Certain Relationships and Related Transactions .......................... 23
Description of Securities ............................................... 24
Market for Common Equity and Related Stockholder Matters ................ 25
Legal Proceedings ....................................................... 25
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 25
Recent Sales of Unregistered Securities; Use of Proceeds from
Registered Securities ................................................. 26
Indemnification of Directors and Officers ............................... 27
Financial Statements, December 31, 1998 ................................. F-1
Financial Statements, Nine Months Ended September 30 .................... F-16
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Description of Exhibits.................................................. 25
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DESCRIPTION OF BUSINESS
Kenwick Industries, Inc. ("Kenwick" or the "Company") is a corporation organized
under the laws of the State of Florida as Kenwick Inc., effective July 7, 1995.
In July, 1998, the Company's name was changed to Kenwick Industries, Inc.
The Company's address is 660 Linton Boulevard, Suite 202, Delray Beach, Florida
33445. Its telephone number is (561) 278-6090.
Kenwick has been doing business as American Video Language Institute since 1995
when the Company acquired certain assets and the rights to license certain
intellectual property from American Video Language Institute, Inc. In August,
1998 the Company acquired Automax USA, Inc., a Florida corporation, and its
subsidiaries Automax International, Inc. and Automax USA Finance, Inc., through
the exchange of stock.
Kenwick owns 80% of the common stock of Sphere Advertising, Inc., a Florida
corporation, incorporated on August 21, 1998 to perform advertising for American
Video Language Institute. This corporation is currently inactive.
American Video Language Institute
American Video Language Institute (AVLI) markets video learning systems that
teach English. AVLI's products include specialty courses that teach basic
English, business English terminology and children's English lessons.
AVLI specializes in videos because:
o Most of its present potential customers have video viewing equipment.
o Videos allow the learner to hear, see, and interact with the lessons,
strengthening both learning and retention.
o The student can replay the instructions as often as needed and at a time
and place convenient to the student.
o Cost of lessons are reasonable and affordable.
In the past, AVLI's primary target customers were immigrants settling in the
United States, institutions, such as libraries, schools, government agencies,
and special-interest groups and interested parties outside the United States.
Most of AVLI's business was derived from immigrant groups coming from China,
Korea, Vietnam and Latin America. Due to the inability of these groups to either
read or speak English, AVLI advertised in the foreign language media appropriate
for the linguistic group. It also employed foreign language speaking marketing
personnel on its premises to respond to 800 number calls from targeted groups.
Due to the weak economy in Asian countries and changes in the educational
background of the AVLI's market, a study was conducted which indicated that the
re-evaluation
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of its marketing approach be made. There is increasing worldwide demand
for the ability to speak English due to the growth of the computer industry
combined with the growth of the Internet. Therefore, AVLI has developed a
new advertising and marketing program to help attain a healthy future
expansion. As a result, AVLI ceased all advertising after May, 1999 and no
longer employs any foreign language speaking telemarketers.
AVLI has formulated two projects utilizing the Internet. Project 1 would offer
the Company's products for sale via the Internet by presentations in foreign
languages geared to reach overseas individuals desiring to learn to speak
English. This project can be implemented in the short to intermediate term
because significant technical development and financing are not required. AVLI
is in the process of discussing with Internet companies, specializing in foreign
language websites, the formation of strategic alliances in the marketing of the
courses. AVLI products would be advertised on, and ordered through, appearances
on its partners' websites in return for a portion of the sales revenues
generated from each site.
Project 2 would create an AVLI website in the United States that could be
accessed worldwide for a fee to obtain AVLI's programs in English speech through
the Internet. This educational website would be used by people in the United
States and abroad who wish to learn English without physical course materials
used in Project 1. The courses offered through the site also would be suitable
for use by various institutions. The website would include chat rooms, related
merchandise offerings and future support. The technical development associated
with Project 2 would take approximately one year after securing the necessary
technical development support. AVLI would seek an Internet website development
firm which would create and maintain the AVLI Project 2 website in return for a
portion of the revenues received from the site. Securing a partner and
development of the Project 2 Site will not commence prior to the implementation
of Project 1.
AVLI already has quality proprietary video properties necessary to present a
full program. Meetings with interested companies are in progress to obtain the
appropriate entity for collaboration to supply the technical and financial
ingredients so that the program to be put into effect.
In order to implement these projects the Company is seeking joint venture
partners or strategic alliances with established companies with the required
technical knowledge and facilities. There is no assurance that the necessary
partners can be found and that the financial projections for these projects can
be met.
There is significant competition in teaching English as a second language. There
are public and private schools, publishers of printed lessons and producers of
audio, video and CD instruction.
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Competition from video lessons similar to the Company's products is very
fragmented. However, there is one high profile competitor, Ingles Sin Barreres,
which specializes in teaching English to Spanish-speaking people only. This
competitor does not have an assortment of products similar to AVLI and its
pricing is substantially higher. Nevertheless, it has established itself
utilizing an advertising budget far exceeding the capabilities of AVLI.
Management believes that its AVLI products are competitively superior in three
areas: quality of products, range of products, and application to various
language groups. In 1995, AVLI's Speak to Me, Sets 1, 2 and 3, were awarded four
star ratings, out of five stars, by the Video Rating Guide for Libraries. The
entire range of a the AVLI products are used by schools and libraries throughout
the United States. AVLI offers a broader range of specialized courses than many
of its competitors. Also, the Company offers courses for speakers of Chinese,
Vietnamese, Korean, Spanish, Portuguese, Russia, and German.
AVLI is positioning itself to take advantage of the expansion of the Internet in
Asia, South America, and Europe and the growing demand for learning English. Its
marketing strategy is to work with a partner who has the ability to present AVLI
programs in Projects 1 and 2, described above, and to conduct an effective
advertising program in various countries to draw attention to the benefits of
AVLI's programs.
AVLI's marketing will be focused on individuals desiring to learn English,
business organizations that will subscribe for employees, schools, distance
learning programs and government agencies.
AVLI has rights in the United States to the following intellectual property:
Trademarks-
1. Speak To Me(TM), U.S. Trademark Reg. No. 1,628,078, registered December
18, 1990
2. Business Express(R), U.S. Trademark Application No. 74/611,814, filed
December 16, 1994
Trade name-
American Video Language Institute
Copyrights-
1. Speak To Me, Set One, Registration No. Pa 1 367 423
2. Speak To Me, Set Two, Registration No. Pa 450 383
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3. Speak To Me, Set Three, Registration No. Pa 465 656
4. Speak To Me Set Survival Vocabulary, Registration No. Pa 523 549
5. English Pronunciation & Vocabulary Course On Video, Registration No. Pa
383 641
6. AVLI English Course, Registration No. Pa 712 822
AVLI owns or has licensed, from Philips Consumer Electronics ("Philips") in
the Netherlands and from Integrated English International, Inc. ("IEI") in
the United States, the following intellectual property:
1. Integrated English - a videotape program which also utilizes audio tapes
and voice monitor to refine pronunciation.
2. International Business - a business language course that deals with global
businesses such as exporting, importing and international finance and
banking.
3. Blip and Blab - a course developed to teach children how to speak English
which combines teaching with entertainment to maintain the child's
interest.
The Company has rights to sell its licensed products exclusively in within
the United States and on a nonexclusive basis anywhere in the world with the
exception of Austria, Germany and Switzerland. AVLI has an option to
exclusive distribution rights in Mexico and Canada. Under the license, the
Company must purchase a minimum quality of product from IEI and pay royalties
to IEI.
The original term of the Philips license was from August 1, 1998 to July 31,
1999. Subsequent to July 31, 1999, either party may terminate the agreement
upon 6 months prior notice. The license may also be terminated by either
party for a substantial breach which is not remedied with 30 days of
receiving notice of the breach. The IEI license is for a term of 5 years from
January 9, 1997. The agreement is automatically renewed for an additional 5
years unless either party gives 60 day notice of termination. The license may
also be terminated by either party for a breach which is not remedied with 10
days of receiving notice of the breach.
AVLI's business, products and properties are not subject to federal state or
local regulation.
The revenues received in 1998 and 1999 by AVLI from the sale of its products
are:
1999
Course 1998 (9 months ended Sept. 30)
------ ---- -------------------------
Speak To Me $ 95,500 $ 34,000
Integrated English 26,500 6,200
Business Express 31,000 3,900
Blip and Blab -- 8,100
International Business -- 1,200
-------- --------
Total $153,000 $ 53,400
AVLI has 3 employees, one full time and two part time.
Automax, USA
Automax operates two locations in South Florida that sell used cars. Automax
retails 4 to 10 year old cars which are divided into four groups: (1) foreign
cars under 100,000 miles; (2) American cars under 90,000 miles; (3) vans, trucks
and sport utility vehicles; and (4) high mileage specialty cars. Automax also
wholesales used cars which do not fit into these four categories.
Through its finance company subsidiary, Automax USA Finance, Inc., Automax
provides financing for its customers ("self financed") by originating retail
automobile installment sales contracts secured by the cars it sells. Automax's
customers typically have limited credit histories, low income and/or past credit
problems. Automax intends to expand primarily by opening additional used car
locations in Florida and extending its operations to other areas of the
southeastern United States.
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Automax believes the quality and reliability of its cars (1) reduce the
probability of product failure (which Management believes is the leading cause
of defaults on finance contracts in Automax's industry), (2) reduce losses on
Automax's repossession of cars, and (3) define the Automax brand. Due to the
quality and reliability of its cars, Automax is able to provide a 24
month/24,000 mile self funded service contract to its customers. The Company
sells used cars in its retail stores for an average price of approximately
$8,000.
We believe that product failure is a leading cause of defaults on finance
contracts in the self financed used car industry. Generally, Automax's cars
are models having good or superior reputation for quality and reliability.
All Automax retail vehicles undergo a comprehensive 110 point inspection,
reconditioning, and, as necessary, repair at our mechanical affiliates, or
our own facilities. Due to the quality, and reliability, condition and age of
Automax's cars, we are able to provide a self funded 24 month/24,000 mile
service contract to our customers. The service contract is a limited warranty
insurance policy on the car's power train. The policy is purchased through an
insurance company and its cost is passed through to the customers through a
portion of the dealer preparation charge. Free maintenance services offered
as a courtesy to customers by Automax include oil and transmission fluid
changes, tire rotation and minor tune-ups. Self funded repairs require
Automax's customers to visit Automax's preferred repair shops, and allow
Automax to evaluate the condition, road worthiness, and mechanical
reliability of its cars from time to time. This gives Automax the opportunity
to evaluate the condition of every vehicle and keep the vehicle powertrain in
road worthy condition.
Automax separates the credit approval process from the sales process. Credit
review approvals conducted by experienced finance personnel at Automax's
headquarters. The credit underwriting process strictly adheres to objective
underwriting standards. This results in improved collection experience. Automax
regularly reviews its collection results to assess the effectiveness of its
underwriting standards.
Automax diligently and proactively pursues collection of its finance
receivables while maintaining a professional, customer friendly atmosphere.
Automax generally begins repossession procedures when a customer is two
payments past due. We believe that one of the reasons Automax generally
experiences lower losses on defaults than our competitors because we act
quickly to repossess our cars when defaults occur. This, in turn, helps
assure that repossessed cars are in better condition than they would be
otherwise.
In order to become the leading self financed retailer of used cars in
southeastern United States, Automax intends to open additional stores in both
the geographic markets where it currently operates and in new markets. The
choice of locations is based upon the presence of suitable customers. Automax's
criteria for opening additional used car locations in existing markets include
sufficient projected incremental sales volume, reconditioning capacity,
geographic media coverage and market share. We believe significant expansion
opportunities satisfying these criteria are available within its existing
markets. Automax's criteria for opening used car locations in
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new markets include the adequacy of radio and television coverage, demographic
makeup of the market, availability of qualified managers, access to an adequate
supply quality used cars and availability of appropriate store locations.
The automobile industry in southern Florida, as well as the Southeast generally,
has consolidated due to the tightening of credit to sub-prime dealers/customers.
Automax draws customers from Miami to Port St. Lucie. There is little
competition in this geographic area for the vehicles sold by Automax.
Competition in Automax's market is based pricing and condition of the vehicles
sold. Reputation and customer service are also important factors. We have many
repeat customers and a good reputation in our geographic area. We sell cars at
100 percent markup, including warranties.
Automax uses TV, radio, newspaper and trade publications to advertise its
vehicles. It also uses direct marketing voice mail and caller ID to accept
responses to Automax ads. Every call is recorded and returned. Customers are
encouraged to visit Automax locations. Other car dealerships are solicited and
their salesmen paid a commission should they refer a customer that purchased an
Automax vehicle.
Automax has fifteen employees. It also has eight commission sales persons. The
number of commission sales persons varies from time to time.
Automax is subject to regulation by various departments of the State of Florida.
The Department of Highway Safety and Motor Vehicles, Division of Motor Vehicles,
licenses Automax as a dealer of motor vehicles. Automax has a Motor Vehicle
Retail Installment Seller License from the Department of Banking and Finance to
conduct motor vehicle retail installment sales. The Department of Agriculture
and Consumer Services, Division of Consumer Services, licenses motor vehicle
repairs. Additionally, Palm Beach County issues a County Occupational License.
The aggregate cost of Automax's licensing fees is under $1000.
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MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following discussion and analysis of the Company's consolidated financial
position and consolidated results of operations should be read in conjunction
with the Company's Selected Consolidated Financial Information included and the
Consolidated Financial Statements and related Notes thereto included herein.
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RESULTS OF OPERATIONS
The Company operates in two business segments:
In August 1995, upon organization, the Company acquired the assets of American
Video Language Institute, Inc. These assets consisted of the trade name,
trademarks and copyrights needed to produce English language courses. The cost
of the acquisition was $725,000, which exceeded the fair value of the net
tangible assets acquired by $655,000.
In August 1998, the Company acquired all of the issued and outstanding shares of
the common stock of Automax USA, Inc., Automax International, Inc. and Automax
USA Finance, Inc. (collectively referred to as "Automax") in exchange for
1,000,000 shares of Kenwick's common stock. This acquisition is being accounted
for by the pooling-of-interest method. Our financial statements have been
restated to reflect the acquisition.
Automax is a Florida corporation organized in 1997, and is engaged in the
business of buying, selling and financing used cars in West Palm Beach, Florida.
COMPARISON OF UNAUDITED YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31,
1998.
The following table sets forth revenues and expenses in aggregate dollars and as
a percentage of net sales for the Company for the years ended December 31, 1997
and 1998. As a result of the Automax acquisition discussed above, and
differences in the unaudited results for the year ended December 31, 1997 and
the audited results of the year ended December 31, 1998, the results of
operations for the year ended December 31, 1998 are not comparable to those for
the year ended December 31, 1997.
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1998 Unaudited 1997
-------------------- ----------------------
<S> <C> <C> <C> <C>
Net Sales $ 3,953,759 100.0% $ 2,111,738 100.0%
Cost of Goods Sold 2,407,599 60.9% 1,209,583 57.3%
Interest Income 315,033 8.0% 7,311 0.3%
General and Administrative Expenses 1,454,919 37.0% 1,226,289 58.1%
Impairment loss 405,000 10.2% --
Income (loss) before Income Tax (75,828) (1.9)% (316,825) (15.0)%
Net income (loss) $ (177,828) (4.5)% $ (316,825) (15.0)%
==================== ======================
</TABLE>
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The differences discussed below between the year ended December 31, 1997 and the
year ended December 31, 1998 are primarily attributable to the acquisition of
Automax in 1998, with the exception of the Impairment Loss.
NET SALES. The Company's revenues increased approximately $1.8 million, or 86%,
from $2.1 million for the year ended December 31, 1997, to $3.9 million for the
year ended December 31, 1998.
COSTS. Costs of goods sold were $2.4 million for the year ended December 31,
1998 compared to $1.2 million during the same period in 1997, representing an
increase of $1.2 million, or 100%.
INTEREST INCOME. Interest income increased from approximately $7,300 for the
year ended December 31, 1997 to $315,000 for the year end December 31, 1998, an
increase of 42 times. Interest income increased primarily due to addition of
the Automax segment. Automax's primary business is buying, selling and
financing used cars and interest income is a significant source of income. The
average Automax loan to customers returns 29% over a three year contract.
IMPAIRMENT LOSS. During 1998, the Company had significant losses from its AVLI
operations resulting in limited cash flow and was unable to market its video
courses. Management reviewed its intangible assets for impairment based on
assessments of future operations and recorded an non-cash impairment loss of
$405,000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(including depreciation and amortization), increased approximately $228,600,
or 19.0%, for the year ended December 31, 1998 compared to 1997. Interest on
the loan from shareholders was approximately $130,400 and approximately
$77,100 interest expense was recorded due to the discount feature of the
convertible debentures. The Company does not foresee any material expenditures
in the near future.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth the major components of the increase in the cash
and cash equivalents of the combined predecessor companies:
For the year ended December 31,
-------------------------------
1998 Unaudited 1997
-------------- --------------
Net cash (used) by operating activities (1,822,951) (1,081,337)
Net cash (used) by investing activities (27,554) (25,608)
Net cash provided by financing activities 1,841,791 1,103,152
Net (decrease) in cash (8,714) (3,793)
The Company requires capital to support increases in finance receivables,
inventories, property and equipment, and working capital for general corporate
purposes. Funding sources available to the Company include operating cash flow,
related party borrowing, third party investors, financial institution borrowing
and borrowing against finance receivables.
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Net cash flows used in operating activities were approximately $1.1 million
and $1.8 million during 1997 and 1998, respectively. Cash used in operating
activities in 1997 can be primarily attributed about $317,000 in net
operating losses, an increase of $628,000 in accounts receivable, and an
increase of $494,000 in inventory. Cash used in operating activities in 1998
can be primarily attributed to an increase of over $1.6 million in accounts
receivable and an increase of about $552,000 in inventory due primarily to
the addition of the Automax segment. Additionally, during 1998, the Company
had significant losses from its AVLI operations resulting in limited cash
flow and was unable to market its video courses. Management reviewed its
intangible assets for impairment based on assessments of future operations
and recorded an impairment loss of $405,000.
Cash used in investing activities was approximately $26,000 and $28,000 during
1997 and 1998, respectively. The 1997 and 1998 amounts reflect the acquisition
of property and equipment consisting of office equipment and of leasehold
improvements.
Cash provided by financing activities was approximately $1.1 million and $1.8
million during 1997 and 1998, respectively. In 1997, over $1 million was raised
through increases in related party loans and over $78,000 was raised by the sale
of common stock. This was offset by an approximate $53,000 principal reduction
on notes payable. In 1998, $400,000 was raised through the sale of debenture
bonds, over $861,000 was raised through increases in related party loans and
over $410,000 was raised by the sale of common stock. This was offset by an
approximate $18,000 principal reduction on notes payable. The Company does not
have a line of credit with any bank.
The activities described above resulted in net decrease in cash of $8,714 in
1998 and $3,793 in 1997.
REVENUES AND EXPENSES BY SEGMENT
The following table sets forth the revenues and expenses of the Company by
segment for the year ended December 31, 1998.
Total/
Kenwick Automax Consolidated
------- ------- ------------
Revenues $ 153,036 $ 3,800,723 $ 3,953,759
Interest Income 1,118 313,915 315,033
Interest expense - regular 42,804 130,357 173,161
Interest expense - discount on
convertible debentures 77,102 -- 77,102
Depreciation and Amortization 65,088 6,199 71,287
Net Income (loss) (567,786) 389,958 (177,828)
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1999.
The following table sets forth revenues and expenses in aggregate dollars and as
a percentage of net sales for the Company for the nine months ended September
30, 1998 and 1999. As a result of the Automax acquisition discussed above, the
results of operations for the nine months ended September 30, 1998 are not
comparable to those for the nine months ended September 30, 1999.
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<TABLE>
<CAPTION>
For the nine months ended September 30,
-----------------------------------------------------
Unaudited 1998 Unaudited 1999
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net Sales $ 2,978,641 100.0% $ 4,297,777 100.0%
Cost of Goods Sold 1,825,109 61.3% 2,957,542 68.8%
Interest Income 236,470 7.9% 1,647,959 38.3%
General and Administrative Expenses 1,117,797 37.5% 1,758,742 40.9%
Income before Income Tax 272,205 9.7% 1,229,452 28.6%
Net income $ 163,323 5.0% $ 737,671 17.2%
======================== ========================
</TABLE>
NET SALES. The Company's revenues increased approximately $1.3 million, or
43% from approximately $3.0 million for the nine months ended September 30,
1998, to $4.3 million for the nine months ended September 30, 1999. Kenwick
revenues continued to decline while Automax revenues increased.
COSTS. Costs of goods sold were $3 million for the nine months ended September
30, 1999 compared to $1.8 million during the same period in 1998, representing
an increase of $1.2 million, or 67%.
INTEREST INCOME. Interest income increased from approximately $236,000 for the
nine months ended September 30, 1998 to $1.6 million for the nine months ended
September 30, 1999, an increase of almost 7 times. The increase in interest
income is attributable to Automax. Automax's primary business activity is
buying, selling and financing used cars and interest income is a significant
source of income.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(including depreciation and amortization), increased from approximately $1.1
million for the nine months ended September 30, 1998 to about $1.8 million
for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth the major components of the increase in the cash
and cash equivalents of the combined predecessor companies:
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<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
Unaudited 1998 Unaudited 1999
------------------ -----------------
<S> <C> <C>
Net cash (used) by operating activities (1,454,677) (551,512)
Net cash (used) by investing activities (20,485) (99,888)
Net cash provided by financing activities 1,585,880 787,337
Net increase in cash 110,718 135,937
</TABLE>
Net cash flows used in operating activities were approximately $1.45 million and
$552,000 during the nine months ended September 30, 1998 and 1999, respectively.
Cash used in operating activities during the nine months ended September 30,
1998 can be primarily attributed about $163,000 in net operating income, an
increase of $2.1 million in accounts receivable, an increase of $562,000 in
inventory, an increase of $164,000 in accounts payable, and an increase of
$123,000 in accrued liabilities. Cash used in operating activities in the nine
months ended September 30, 1999 can be primarily attributed to about $738,000 in
net operating income, an increase of over $2.1 million in accounts receivable,
an increase of $209,000 in inventory, an increase of $30,000 in accounts
payable, and an increase of $477,000 in accrued liabilities. The increases
are primarily due to the addition of the Automax segment.
Cash used in investing activities was approximately $20,000 and $100,000 during
the nine months ended September 30, 1998 and 1999, respectively. The 1998 and
1999 amounts reflect the acquisition of property and equipment consisting of
office equipment and leasehold improvements.
Cash provided by financing activities was approximately $1.59 million and
$787,000 during the nine months ended September 30, 1998 and 1999, respectively.
During the six months ended September 30, 1998, over $1 million was raised
through increases in related party loans and $356,000 was raised by the sale of
convertible debentures. During the six months ended June 30, 1999, over $442,000
was raised through increases in related party loans and over $317,000 was raised
by the sale of convertible debentures.
The activities described above resulted in net increase in cash of $111,000 and
$136,000 for the nine month period ended September 30, 1998 and 1999,
respectively.
REVENUES AND EXPENSES BY SEGMENT
The following table sets forth the unaudited revenues and expenses of the
Company by segment for the nine months ended September 30, 1998.
For the 9 Months Ended September 30, 1998 (unaudited)
Total/
Kenwick Automax Elim Consolidated
------- ------- ---- ------------
Revenues 128,099 2,850,542 2,978,641
Interest Income 1,034 235,436 236,470
Interest Expense 101,024 97,768 198,792
Deprecation and
Amortization 52,955 4,649 57,604
Net Income (Loss) (214,826) 378,149 163,323
Total Assets 841,684 3,459,941 (534,000) 4,201,625
The following table sets forth the unaudited revenues and expenses of the
Company by segment for the nine months ended September 30, 1999.
For the 9 Months Ended September 30, 1999 (unaudited)
Total/
Kenwick Automax Elim Consolidated
------- ------- -------- ------------
Revenues 53,382 4,244,395 4,297,777
Interest Income 4 1,647,955 1,647,959
Interest Expense 88,312 147,607 235,919
Deprecation and
Amortization 17,508 7,818 25,326
Net Income (Loss) (235,104) 972,775 737,671
Total Assets 895,819 5,732,210 (534,542) 6,093,487
OPERATIONAL CHANGES.
American Video Language Institute
AVLI has not produced sufficient revenues in the past two fiscal years to cover
expenses. Therefore, the Company has undertaken a complete reassessment of
marketing techniques, advertising expenditures and personnel. Substantial
changes in this division are now underway.
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The prime target customers for our English Speech Videos were immigrants to the
United States from the Pacific Rim, Latin America and Eastern Europe. In the
past the Company invested in continuous advertising in foreign language media in
an attempt to develop consumer recognition and attention. This program was
supported by foreign speaking telemarketers to respond to questions from
prospective customers and to finalize orders.
Changes in the market, due in part to a more English proficient immigrant,
paired with the support of foreign communities within the United States have
reduced the traditional target market. Furthermore, substantially increased
marketing by competitors aimed at the Spanish speaking market, a still viable
market, has caused the Company to reconsider its marketing strategies and goals
and to undertake major changes.
There is still a worldwide need for proficiency in the English language. With
the growth of the Internet, the need may even be greater now than ever before.
With this in mind, the Company has formulated a strategy to utilize the Internet
as an effective vehicle for selling and transmitting educational properties such
as those owned by the Company.
The Company is now in the development phase of forming alliances with companies
currently active in the sale of language and educational properties through the
Internet. We are negotiating with several companies who have both established
Internet presence and consumer interest. Our programs can be effectively
integrated with the offerings of these companies at no cost to the Company. AVLI
can offer not only its educational properties but can offer its proven ability
to produce and ship its quality, award-winning programs to consumers. The
Company's knowledge of the market and its experience with foreign consumers is
an added incentive for Internet companies to form an alliance with AVLI.
Progress has been made with interested parties and AVLI is optimistic that it
will finalize an agreement shortly which should turn this division into a
profitable one. However, there can be no assurance that negotiations will be
concluded successfully.
While attempting to form our new alliances and Internet sales programs, AVLI has
made the following changes in an attempt to reduce overhead and to channel the
corporate energies toward the ultimate goal of Internet inclusion.
1. Personnel were reduced from 9 to 3 people.
2. Advertising has been cancelled.
3. Telemarketing has ceased, thus, substantially reducing phone
expenses.
4. Since space requirements have diminished, the Company has reduced
the size of its corporate headquarters.
With the focus on establishing strategic alliances to sell its educational
properties and the cost cutting outlined above, AVLI hopes to improve revenues
and profits in near future when the alliances are established.
16
<PAGE>
Automax
Automax was established in the first quarter of 1997 by Andrea Parkoff, who
purchased the assets of Exim Motorworks, a company involved in mechanical
repairs, body works and the sales of used vehicles. Automax was acquired by
Kenwick in August 1998 for one million (1,000,000) shares of Common Stock.
Automax has two locations in West Palm Beach, Florida.
The Company's vehicles undergo thorough inspection, reconditioning and, as
necessary, repair. Through our finance company subsidiary, we provide financing
for our customers by originating retail automobile installment sales contracts
secured by the cars we sell. Revenues from Automax include the sales of used
vehicles, automotive repairs, bodywork and automobile financing. We believe that
the quality and reliability of the Company's cars reduce the probability of
product failure which industry analysts believe is traditionally the leading
cause of defaults on finance contracts.
The market for the sale of the Company's vehicles, although general in nature,
targets customers who are "high risk" borrowers. Since the majority of all sales
are financed directly by Automax, the price of each vehicle, and the interest
rate charged for financing, reflect the risks inherent in selling to this
market. The sale price must take into consideration the possibility of
repossession and consequent reconditioning.
The Company benefits from repossessing vehicles. The original purchaser forfeits
the down payment and any weekly payments received and the sales price of the
vehicle reverts to its original sales price. Even taking into account any
necessary reconditioning, repairs, and repossession costs, the Company realizes
additional significant revenues on all repossessions. Given the customer base,
we closely track current information on each of its finance customers, including
employment and residence, in the event that repossession becomes necessary.
Additionally, unlike traditional finance contracts, payments are demanded on a
weekly, rather than monthly, basis so that any payment defaults can be dealt
with more swiftly than with traditional contracts and can thereby minimize its
loss exposure. We take aggressive action if the customer fails to continue
making payments.
All monies received from sales and financing, after overhead and expenses are
paid, are invested in the purchase of additional vehicles. Since the Company
internally finances the majority of its receivables, in order to effect growth,
the Company must seek outside financing. To date Automax has been unable to
secure such financing. The parent company, Kenwick Industries, Inc., has loaned
Automax funds to purchase new inventory. In the future, additional monies from
Kenwick might not be available.
The used car industry in which the Automax competes is highly fragmented and
very competitive. Although most other retailers face increased competition from
automobile consolidators such as CarMax and AutoNation USA, as well as the
marketing of used vehicles on the Internet, Automax does not market to the same
consumer. Unlike Automax, these retailers focus on the
17
<PAGE>
consumer who can readily qualify for conventional financing. The primary focus
of the Company's marketing strategy for its used cars is its ability to finance
consumers with poor credit histories. However, given the target consumer of
Automax, as long as we can provide financing to poor credit consumers, Automax's
sales potential appears to be good.
The Company offers financing to its customers who purchase used cars at its used
car locations. Automax does not give any loans to persons who are not customers.
The Company has established a policy not to acquire third party originated
finance contracts. It provides financing only for its own customers, thereby
relying on its own underwriting standards and not those of a third party. The
Company finances approximately 95% of the used car sales through finance
contracts that the Company originates and services.
DESCRIPTION OF PROPERTY
In April 1997, Kenwick entered into a five-year lease, for the term June, 1997
through May, 2002, for 1990 square feet of office space at 2455 East Sunrise
Boulevard, Fort Lauderdale Florida. The rent for the first year was $2,611.88
per month and increases to $3,056.11 per month in the fifth year. The lease is
guaranteed by Kenneth Wulwick and Sheldon Glickman, both officers and directors
of the Company, and Jerold Nabridge, husband of Margaret Nabridge, an officer
and director of the Company. In December 1999 this premise was sublet for the
remainder of the lease period at a base rent of $2,825.00 per month plus 4%
annual increases.
In August 1999, Andrea Parkoff, the former owner of Automax USA and Michael
Parkoff, her husband entered into a three-year lease, for the term August, 1999
through July, 2002, for the premises located at 216 North Military Trail, West
Palm Beach, Florida, at a rent of $8,000 per month. This premise was sublet to
Automax on the same date.
In January 1998, Automax USA entered into a five-year lease, for the term
January 20, 1998 through January 19, 2003, for the premises located at 813 North
Military Trail, West Palm Beach, Florida, at a rent of $10,000 per month.
In January 2000, the Company entered into a three year, lease for the term
January, 2000 through January, 2003, for 760 square feet of office space at 660
Linton Boulevard, Delray Beach, Florida, at a rent of $939.87 per month.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 15, 2000 by (i) each
person or entity known to the Company to own beneficially five percent or more
of the Company's Common Stock, (ii) each of the Company's directors, and (iii)
the Company's executives.
18
<PAGE>
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
Name and Address of Amount and Nature
Title of Class Beneficial Owner (1) of Beneficial Owner Percent of Class
<S> <C> <C> <C>
Common Stock Sheldon Glickman 771,429 (2) (3) 7.06
Common Stock Margaret Nabridge 836,429 (3) (4) 7.66
Common Stock Andrea Parkoff
2483 NW 66 Dr. 1,000,000 9.16
Boca Raton, FL 33496
Common Stock Ronnie S. Wulwick 929,671 (5) (6) 8.51
10180 Shireoaks Ln.
Boca Raton, FL 33480
</TABLE>
(1) The address of all persons who are executive officers or directors of the
Company is in care of the Company, 660 Linton Boulevard, Suite 202, Delray
Beach, Florida 33445.
(2) Sheldon Glickman is an officer and director of the Company. Of this total
number, Stephanie Jill Cohen, a daughter of Sheldon Glickman owns 10,000 shares;
Michelle Engel, a daughter of Sheldon Glickman owns 20,000 shares individually
or as custodian; Marla Joan Glickman, a daughter of Sheldon Glickman owns 10,000
shares; and Monica Glickman Haber, a daughter of Sheldon Glickman owns 15,000
shares individually or as custodian.
(3) Does not include options to purchase 200,000 shares of Common Stock at
$0.4375 per share which are exercisable in three equal installments commencing
July 15, 1997, January 15, 1998 and July 15, 1998, respectively, until March 31,
2002.
(4) Margaret Nabridge is an officer and director of the Company. Of this total
number, Donna Nabridge Bland, a daughter of Margaret Nabridge, owns 15,000
shares individually as custodian; Brett Nabridge, a son of Margaret Nabridge,
owns 6,000 shares; Caren Fersten Nabridge, the daughter-in-law of Margaret
Nabridge, owns 23,000 shares individually or as custodian; Elyssa Nabridge, the
daughter of Margaret Nabridge, owns 10,000 shares; Jerold Nabridge, the husband
of Margaret Nabridge, owns 8,000 shares; and Robert Nabridge, a son of Margaret
Nabridge, owns 10,000 shares.
19
<PAGE>
(5) Ronnie S. Wulwick is the wife of Kenneth S. Wulwick, an officer and director
of the Company. Of this total number, Norman Wulwick, the uncle of Ronnie S.
Wulwick, owns 100 shares, and Samuel Wulwick, the father-in-law of Ronnie S.
Wulwick, owns 1,000 shares.
(6) Does not include options granted to Kenneth S. Wulwick to purchase 200,000
shares of Common Stock at $0.4375 per share which are exercisable in three equal
installments commencing July 15, 1997, January 15, 1998 and July 15, 1998,
respectively, until March 31, 2002.
Security Ownership of Management
Name and Address of Amount and Nature
Title of Class Beneficial Owner (1) of Beneficial Owner Percent of Class
Common Stock Sheldon Glickman 771,429 (2) (3) 7.06
Common Stock Margaret Nabridge 836,429 (3) (4) 7.66
Common Stock Kenneth S. Wulwick 929,671 (5) (6) 8.51
Common Stock Andrea Parkoff 1,000,000 9.16
All directors
and executive
officers as
a group
(4 persons) 3,537,529 32.39
(1) The address of all persons who are executive officers or directors of the
Company is care of the Company, 660 Linton Boulevard, Suite 202, Delray
Beach, Florida 33445.
(2) Sheldon Glickman is an officer and director of the Company. Of this total
number, Stephanie Jill Cohen, a daughter of Sheldon Glickman owns 10,000 shares;
Michelle Engel, a daughter of Sheldon Glickman owns 20,000 shares individually
or as custodian; Marla Joan Glickman, a daughter of Sheldon Glickman owns 10,000
shares; and Monica Glickman Haber, a daughter of Sheldon Glickman owns 15,000
shares individually or as custodian.
(3) Does not include options to purchase 200,000 shares of Common Stock at
$0.4375 per share which are exercisable in three equal installments commencing
July 15, 1997, January 15, 1998 and July 15, 1998, respectively, until March 31,
2002.
(4) Margaret Nabridge is an officer and director of the Company. Of this total
number, Donna Nabridge Bland, a daughter of Margaret Nabridge, owns 15,000
shares individually or as custodian; Brett Nabridge, a son of Margaret Nabridge,
owns 6,000 shares; Caren Fersten Nabridge, the daughter-in-law of Margaret
Nabridge, owns 23,000 shares individually or as custodian; Elyssa Nabridge, the
daughter of Margaret Nabridge, owns 10,000 shares; Jerold Nabridge, the husband
of Margaret Nabridge, owns 8,000 shares; and Robert Nabridge, a son of Margaret
Nabridge, owns 10,000 shares.
(5) Kenneth S. Wulwick is an officer and director of the Company. Mr. Wulwick
owns none of the securities shown. Of this total number, Ronnie S. Wulwick, the
wife of Kenneth S.
20
<PAGE>
Wulwick, owns 928,571 shares, Norman Wulwick, the uncle of Kenneth S. Wulwick,
owns 100 shares, and Samuel Wulwick, the father of Kenneth S. Wulwick, owns
1,000 shares.
(6) Does not include options granted to Kenneth S. Wulwick to purchase 200,000
shares of Common Stock at $0.4375 per share which are exercisable in three equal
installments commencing July 15, 1997, January 15, 1998 and July 15, 1998,
respectively, until March 31, 2002.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following sets forth information, as of September 30, 1999, concerning the
Company's directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position Since
<S> <C> <C> <C>
Kenneth S. Wulwick 53 Chief Executive Officer, President and July, 1995
Director
Sheldon Glickman 66 Senior Vice President, Sales and Marketing July, 1996
and Director
Margaret Nabridge 54 Senior Vice President, Planning, Secretary July, 1996
and Director
Andrea Parkoff 49 President, Automax August, 1998
</TABLE>
Kenneth S. Wulwick serves as Chief Executive Officer of the Company, President
and a Director since its inception in July, 1995. Mr. Wulwick graduated from C.
W. Post College in New York in 1969 with a Bachelor of Science degree in
marketing. From 1975 through 1995 Mr. Wulwick served as Executive Vice President
in charge of hard lines for Playtogs Factory Outlet, an independent discount
store selling a complete variety of consumer goods. Mr. Wulwick was responsible
for merchandising and procurement of hard goods sold in his retail outlet,
control of inventory and advertising. From September 1969 through 1975 Mr.
Wulwick was the resident buyer for a buying syndicate involved in electronics
industry.
Sheldon Glickman serves as Senior Vice President in charge of Sales and
Marketing and a Director of the Company. Mr. Glickman graduated from City
College of New York, Bernard Baruch campus with a Bachelor of Business
Administration degree with a major in international trade in 1955. Mr. Glickman
has at least 40 years experience in merchandising and sales with extensive
background in domestic and international trade. From 1995 to present, Mr.
Glickman served as President and Chief Executive Officer of In Focus
International, Inc., a company involved in international trade and development
of furniture products of foreign origin for sale within the United States. From
1992 to 1995, Mr. Glickman served as Chief Executive Officer of Pricerite
Stores, a Hong Kong retail chain. From 1989 to 1992, Mr. Glickman served as
21
<PAGE>
President of the Sheldon Glickman Company. The company specialized in sales to
large United States retailers of goods.
Margaret Nabridge serves as Senior Vice President of Planning, Secretary, and a
Director of the Company. From 1988 to 1996, Ms. Nabridge was Chief Executive
Officer of Abstractions II Inc., a national interior design firm specializing in
both commercial and residential installations with particular emphasis on the
design needs of the health care industry. She currently divides her time 70% to
Kenwick and 30% to Abstractions II. From 1994 through 1996, Ms. Nabridge served
as a consultant to Laser Vision of America, Inc. a corporation serving the
ophthalmic medical community with mobile laser units throughout North Carolina.
Ms. Nabridge developed the concept of providing the advanced ophthalmic lasers
on a mobile, cost per use, basis to physicians. From 1974 to 1980, Ms. Nabridge
was the Chief Executive Officer of Miami Medical Pavilion, North Shore Medical
Pavilion and Deerfield Medical Pavilion where she built, designed, purchased and
staffed each of the facilities, oversaw and directed a large staff of auxiliary
personnel and medical technicians, concentrated on marketing strategies and
enhanced patient relations. Ms. Nabridge graduated from the City University of
New York, Hunter College, cum laude, in 1996 with a dual major in psychology in
education. She was a member of both the education and psychology honor
societies. She received a Juris Doctor degree from the Shepherd Law Center, Nova
University, Fort Lauderdale, Florida, magna cum laude in 1984.
Andrea Parkoff serves as President of Kenwick' Automax segment, a position
she has held since the Company acquired Automax USA in August, 1998. She
graduated Fairleigh Dickenson University in 1971 with a BA in Education.
After college, she entered the construction business and in 1983 founded
Corniche Homes in New Jersey which grew into a multi million dollar business.
In 1983, Ms. Parkoff entered automobile business part-time in south Florida
by financing Exim Motorworks, a body shop and automobile business in Lake
Worth, Florida. The business grew to $2 million sales in 1996. In January
1997, Ms. Parkoff formed Automax USA, the successor to Exim Motorworks.
EXECUTIVE COMPENSATION
The following table discloses the annual and long-term compensation earned for
services rendered in all capacities by the Company's Chairman of the Board and
President and the Company's three other most highly compensated executive
officers for 1996, 1997, 1998 and 1999:
22
<PAGE>
Summary Compensation Table
Securities
Underlying
Salary Options
Name and Principal Position Year ($) (#)
Kenneth S. Wulwick,
CEO, President and Director
1996 20,000 --
1997 38,333 100,000(1)
1998 36,280(2) --
1999 36,334(3) 100,000
Sheldon Glickman,
Senior Vice President and Director
1996 1,250 --
1997 13,670 100,000(1)
1998 13,835(4) --
1999 16,710 100,000
Margaret Nabridge,
Senior Vice President and Director
1996 1,250 --
1997 34,175 100,000(1)
1998 34,940(5) --
1999 35,673(6) 100,000
Andrea Parkoff
President - Automax
1998 23,000(7)
1999 37,000(7)
(1) In 1997, the Company granted options for 360,800 shares to key employees at
an exercise price of $3.00 per share. In 1999, the grant was modified to 300,000
at an exercise price of the then current market, $0.4375.
(2) Reflects $21,280 actual compensation and $15,000 imputed compensation
reflecting the fair market value of services performed based on duties, hours
worked and comparable rates.
(3) Reflects $28,334 actual compensation and $8,000 imputed compensation
reflecting the fair market value of services performed based on duties, hours
worked and comparable rates.
(4) Reflects $6,835 actual compensation and $7,000 imputed compensation
reflecting the fair market value of services performed based on duties, hours
worked and comparable rates.
(5) Reflects $29,940 actual compensation and $5,000 imputed compensation
reflecting the fair market value of services performed based on duties, hours
worked and comparable rates.
(6) Reflects $30,673 actual compensation and $5,000 imputed compensation
reflecting the fair market value of services performed based on duties, hours
worked and comparable rates.
(7) Reflects imputed compensation reflecting the fair market value of services
performed based on duties, hours worked and comparable rates.
OPTIONS GRANTED IN 1999
(Individual Grants)
<TABLE>
<CAPTION>
Number of Percent of
securities total options
underlying granted to
options employees in Exercise price Expiration
Name granted (#) fiscal year ($/Sh) date
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Kenneth S. Wulwick,
CEO, President and
Director 100,000 33.3% $0.4375 3/31/02
Sheldon Glickman,
Senior Vice President
and Director 100,000 33.3% $0.4375 3/31/02
Margaret Nabridge,
Senior Vice President
and Director 100,000 33.3% $0.4375 3/31/02
</TABLE>
AGGREGATED OPTION EXERCISES IN 1999
(Individual Grants)
<TABLE>
<CAPTION>
Number of Value of
securities unexercised
underlying in-the-money
unexercised options at
options at 1999-end ($)
Shares 1999-end exercisable/
acquired on Value realized exercisable/ unexercisable
Name exercise (#) ($) unexercisable (1)
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Kenneth S. Wulwick,
CEO, President and
Director 0 0 200,000/0 0/0
Sheldon Glickman,
Senior Vice President and
Director 0 0 200,000/0 0/0
Margaret Nabridge,
Senior Vice President and
Director 0 0 200,000/0 0/0
</TABLE>
(1) The closing price was $0.271 on December 22, 1999, the last day in 1999 the
Company's stock traded.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two years, the company had the following transactions with
certain persons identified in Items 4 and 5 above:
<TABLE>
<CAPTION>
Year Person Position Transaction Amount ($)
---- ------ -------- ----------- ----------
<S> <C> <C> <C> <C>
1997 Kenneth S. Wulwick CEO, President, Director Payment of outstanding loan(1) (68,130)
Andrea Parkoff President-Automax Loan(2) 2,114,713
1998 Kenneth S. Wulwick CEO, President, Director Payment of outstanding loan(1) (107,677)
</TABLE>
(1) The loan from Mr. Wulwick is a non-interest bearing open loans. As of
December 31, 1998, there was a balance due of $37,507.
(2) The loan from Ms. Parkoff requires principal payments of $20,000 per
month commencing November 1, 1998 and on the first day of each month
thereafter. The note matures on March 1, 2009. The loan was non-interest
bearing until March 1, 1999 at which time interest is payable at prime plus
1/2%. For the year ended December 31, 1998, interest expense of $137,731 was
imputed along with a corresponding credit to additional paid in capital.
Interest was calculated at prime plus 1/2%. The Company was in default with
the above principal payments and has obtained a waiver from the Ms. Parkoff
while the terms are being renegotiated.
23
<PAGE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of Common Stock, $.01 par
value per share, the 10,921,683 shares of which are issued and outstanding as of
February 15, 2000. Of this amount, 3,861,729 shares are restricted and 7,059,954
shares are free trading stock.
Holders of Common Stock are entitled to one vote per share of all matters to be
voted on by the shareholders and do not have cumulative voting rights. Subject
to the rights of holders of outstanding shares of preferred stock, if any, the
holders of Common Stock are entitled to receive such dividends, if any, as may
be declared from time to time by the Board of Directors in its discretion in
legally available funds. There are presently no plans to pay dividends with
respect to the shares of Common Stock. Upon liquidation, dissolution or winding
up of the Company, after payment of creditors and holders of any senior
securities of the Company, including preferred stock, if any, the assets of the
Company will be divided per route honor per share basis among the holders of the
shares of Common Stock. All shares of Common Stock are fully paid and
nonassessable.
24
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market information
Until January 19, 2000, the Company's Common Stock was traded on the Over The
Counter Bulletin Board ("OTCBB") system under the symbol KWIN. It was delisted
on January 20, 2000 for failing to meet the OTCBB Eligibility Rules. The
Company's Common Stock is currently quoted in the National Quotation Bureau's
"pink sheets".
The high and low bids, by quarter, for the Company's Common Stock for the period
that such information is available are:
Quarter High Bid Low Bid
------- -------- -------
October, 1999 - December, 1999 1 1/4 5/32
July, 1999 - September,1999 2 3/16 1/2
April, 1999 - June, 1999 2 1/16 7/16
January, 1999 - March, 1999 1 19/32 7/16
October, 1998 - December, 1998 1 9/16 5/8
July, 1998 - September,1998 4 3/16 1 1/16
April, 1998 - June, 1998 7 5/16 2
March 1998 5 1/4 4
As of February 15, 2000, there were approximately 250 holders of record of the
Company's Common Stock.
The Company has not paid dividends on shares of its Common Stock. There
presently are no plans to pay dividends with respect to the shares of Common
Stock.
LEGAL PROCEEDINGS
There are no legal proceedings currently pending against the Company.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
Within the past three years, the Company has sold the following securities
without registering the securities under the Securities Act.
<TABLE>
<CAPTION>
Exemption
Amount ---------
Date Title ($) Purchaser (Section/Rule)
----
<S> <C> <C> <C> <C>
July 31, 1997 Common Stock 10,000 Rosebud Financial, Inc. 4(2) (services)
Dec. 2, 1997 - Common Stock @ $3.50/share 98,245 Various Purchasers 504
Nov. 29, 1998
Jan. 20, 1998 - Common Stock @ $3.50/share 411,131 Various Purchasers 504
Mar. 27, 1998
Feb. 25, 1998 Common Stock 2,000 Claudia Zaman 4(2) (services)
Apr. 2, 1998 Common Stock 300 Wall Street 4(2) (services)
Communications
Apr. 16, 1998 Common Stock 2,500 Venture Capital & 4(2) (services)
Marketing
May 11, 1998 Common Stock 1,000 Venture Capital & 4(2) (services)
Marketing
May 22, 1998 Common Stock 500 Venture Capital & 4(2) (services)
Marketing
June 16, 1998 Common Stock 1,000 Bonnie Bonomo 4(2) (services)
July 6, 1999 Common Stock 600 Brett Nabridge 4(2) (services)
July 14, 1998 Common Stock 200 Keith Decker 4(2) (services)
July 14, 1998 Common Stock 200 Portfolio Investments 4(2) (services)
July 16, 1998 Series A Convertible Debenture 175,000 Sholem Liebenthal 504
Sept. 2, 1998 Common Stock 300 Wall Street 4(2) (services)
Communications
Sept. 16, 1998 Series B Convertible Debenture 225,000 Sholem Liebenthal 504
Oct. 19, 1998 Common Stock 2,500 Bonomo Inc. 4(2) (services)
Oct. 20, 1998 Common Stock 900 Portfolio Investments 4(2) (services)
Nov. 20, 1998 Series C Convertible Debenture 115,000 Amram Rothman 504
Dec. 23, 1998 Common Stock 2,500 Bonomo Inc. 4(2) (services)
Feb. 1, 1999 Series D Convertible Debenture 115,000 Joshua Heimlich 504
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exemption
Amount ---------
Date Title ($) Purchaser (Section/Rule)
----
<S> <C> <C> <C> <C>
Feb. 22, 1999 Series E Convertible Debenture 170,000 Amram Rothman 504
Mar. 28, 1999 Series F Convertible Debenture 200,000 Y. L. Hirsch 504
July 22, 1999 Series G Convertible Debenture 175,000 HLKT Holdings, LLC 504
Sept. 21, 1999 Series H Convertible Debenture 225,000 M&B Trading, LLC 504
January 6, 2000 Series I Convertible Debenture 115,000 M&B Trading, LLC 504
</TABLE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 607.0850 of the Florida Business Corporation Act provides that a
corporation shall have power to indemnify any person who was or is a party to
any proceeding (other than an action by, or in the 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 against liability incurred in connection with such
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
27
[cad 192]<PAGE>
KENWICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1998
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders
of Kenwick Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Kenwick
Industries, Inc. and Subsidiaries as of December 31, 1998 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. 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 Kenwick Industries,
Inc. and Subsidiaries as of December 31, 1998, and the results of its operations
and cash flows for the year then ended, in conformity with generally accepted
accounting principles.
October 13, 1999 Puritz & Weintraub, LLP
Plantation, Florida Certified Public Accountants
F-2
<PAGE>
KENWICK INDUSTRIES, INC.
Consolidated Balance Sheet
December 31, 1998
ASSETS
<TABLE>
<S> <C>
Cash $ 12,037
Installment loans receivable, net 2,351,904
Inventory 1,101,639
Property and equipment, net 63,653
Intangible assets 110,732
Security deposits and other assets 6,537
-----------
Total assets $ 3,646,502
===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Accounts payable and accrued expenses $ 384,765
Payroll tax payable 78,424
Due to related parties 2,152,220
Notes payable 304,691
Convertible debentures 242,500
Income tax payable 102,000
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued
Common stock, $.01 and par value, 10,000,000 shares authorized, 42,335
4,233 497 shares issued and outstanding
Additional paid in capital 938,037
Retained (deficit) (598,470)
-----------
Total liabilities and stockholders' equity $ 3,646,502
===========
</TABLE>
Notes to financial statements are an integral part of this statement.
F-3
<PAGE>
KENWICK INDUSTRIES, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
RESTATED UNAUDITED
1998 1997
---------- ----------
<S> <C> <C>
NET SALES $3,953,759 $2,111,736
LESS: COST OF GOODS SOLD 2,407,599 1,209,583
---------- ----------
GROSS PROFIT 1,546,160 902,153
INTEREST INCOME 315,033 7,311
---------- ----------
INCOME BEFORE OPERATING EXPENSES 1,861,193 909,464
---------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising 88,522 208,600
Amortization 45,543 44,478
Provision for doubtful accounts 426,428 301,739
Depreciation 25,744 7,514
Interest 173,161 33,790
Insurance 32,950 61,274
Rent 187,313 71,827
Salaries and commissions 44,299 39,704
Officers' salaries 108,055 86,178
Taxes and licenses 14,105 13,212
Other general & administrative expenses 308,799 357,973
---------- ----------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 1,454,919 1,226,289
---------- ----------
INCOME FROM OPERATIONS 406,274 (316,825)
---------- ----------
OTHER EXPENSES
Interest-discount on convertible debentures 77,102 -
Impairment loss 405,000 -
---------- ----------
Total other expenses 482,102 -
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX (75,828) (316,825)
INCOME TAX 102,000 -
---------- ----------
NET INCOME (LOSS) $ (177,828) $ (316,825)
========== ==========
BASIC EARNINGS PER SHARE:
Weighted average shares outstanding 3,907,743 3,620,113
========== ==========
Earnings per share:
Income from operations $ 0.10 $ (0.09)
========== ==========
Net income (loss) $ (0.05) $ (0.09)
========== ==========
DILUTED EARNINGS PER SHARE:
Adjusted weighted average shares outstanding 3,961,917 3,620,113
========== ==========
Earning per share:
Income from operations $ 0.10 $ (0.09)
========== ==========
Net income (loss) $ (0.04) $ (0.09)
========== ==========
</TABLE>
Notes to financial statements are an integral part of this statement.
F-4
<PAGE>
KENWICK INDUSTRIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ --------- --------- -----
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997....... 3,571,429 $35,714 $ 16,556 $(103,817) $ (51,547)
Sale of common stock.............. 128,070 1,281 74,657 -- 75,938
Net (loss) - 1997 (Unaudited)..... -- -- -- (316,825) (316,825)
--------- ------- -------- --------- ---------
Balances at December 31, 1997..... 3,699,499 36,995 91,213 (420,642) (292,434)
Conversion of debentures
to equity....................... 229,532 2,295 155,205 -- 157,500
Sale of common stock.............. 117,466 1,175 409,956 -- 411,131
Issuance of common stock
for services.................... 187,000 1,870 16,830 -- 18,700
Discount on debentures............ -- -- 77,102 -- 77,102
Imputed interest on non-interest
bearing loan from shareholder... -- -- 137,731 -- 137,731
Imputed officer's salaries........ -- -- 50,000 -- 50,000
Net income - 1998................. -- -- -- (177,828) (177,828)
--------- ------- -------- --------- ---------
Balances restated at
December 31, 1998............... 4,233,497 $42,335 $938,037 $(598,470) $ 381,902
========= ======= ======== ========= =========
</TABLE>
Notes to financial statements are an integral part of this statement.
F-5
<PAGE>
KENWICK INDUSTRIES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
RESTATED UNAUDITED
1998 1997
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ (177,828) $ (316,825)
Adjustment to reconcile net income (loss) to
cash (used in) operating activities:
Depreciation and amortization.................... 71,287 51,992
Interest - discount on convertible debentures.... 77,102 --
Impairment loss.................................. 405,000 --
Issuance of common stock for services............ 18,700
(Increase) in accounts receivables.......... (1,663,698) (627,793)
(Increase) in security deposit.............. (940) (1,024)
(Increase) in inventory..................... (552,085) (493,738)
Decrease in other assets.................... 373 4,413
Increase/(decrease) in accounts payable..... (140,907) 261,259
Increase in payroll tax payable............. 38,045 40,379
Increase in income tax payable.............. 102,000 --
---------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES.......... (1,822,951) (1,081,337)
---------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment............... (27,554) (25,608)
---------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES.......... (27,554) (25,608)
---------- -----------
FINANCING ACTIVITIES
Principal reduction on note payable.............. (18,228) (53,035)
Sale of debenture bonds.......................... 400,000 --
Increase in contributed capital.................. 187,731 --
Increase in related party loans.................. 861,157 1,077,749
Sale of common stock............................. 411,131 78,438
---------- -----------
NET CASH PROVIDED IN FINANCING ACTIVITIES........ 1,841,791 1,103,152
---------- -----------
NET (DECREASE) IN CASH................................ (8,714) (3,793)
CASH AT THE BEGINNING OF THE YEAR..................... 20,751 24,544
---------- -----------
CASH AT THE END OF THE YEAR........................... $ 12,037 $ 20,751
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest......... $ 35,523 $ 28,854
========== ==========
</TABLE>
Notes to financial statements are an integral part of this statement.
F-6
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Company operates in two business segments:
In August 1995, upon organization, the Company acquired the assets of American
Video Language Institute, Inc. These assets consisted of the trade name,
trademarks and copyrights needed to produce the English language courses. The
cost of the acquisition was $725,000, which exceeded the fair value of the net
tangible assets acquired by $655,000.
In August 1998, the Company acquired all of the issued and outstanding shares of
the common stock of Automax USA, Inc., Automax International, Inc. and Automax
USA Finance, Inc. (collectively referred to as "Automax") in exchange for
1,000,000 shares of Kenwick's common stock. This acquisition is being accounted
for by the pooling-of-interest method. These financial statements have been
restated to reflect the acquisition.
Automax is a Florida corporation organized in 1997, and is engaged in the
business of buying, selling and financing used cars in West Palm Beach, Florida.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
The Company and its subsidiaries utilizes the accrual basis of accounting. Sales
are recorded when products are shipped or when cars are delivered. The Company
recognizes interest on its installment loans receivable over the terms of the
loan using the interest method.
Installment Loans Receivable
The installment loans receivable are stated at the amount of unpaid principal
reduced by an allowance for doubtful accounts as follows:
F-7
<PAGE>
Installment Loans Receivable (Cont'd.):
Automax Kenwick Combined
------- ------- --------
Retail trade receivables $2,704,046 $7,325 $2,711,371
Less: allowance for doubtful accounts (359,467) -- (359,467)
---------- ------ ----------
$2,344,579 $7,325 $2,351,904
========== ====== ==========
The receivables are collateralized by automobiles. If payments are delinquent,
the Company repossesses the automobiles which are then resold.
The allowance for doubtful accounts is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The Company makes
continuous credit reviews of the loan portfolios and considers current economic
conditions, review of specific problem loans, and other factors in determining
the adequacy of its allowances. The Company's charge-off policy is based on a
loan-by-loan review. Since the Company has a short history, historical
information is being developed.
Inventories
Kenwick's inventories consist of blank and completed video tapes and shipping
materials. Inventories are stated at the lower of cost (determined on the
first-in first-out basis) or market.
Automax's inventories consist of used automobiles held for sale using the
specific identification method. Cost includes acquisition expenses, including
reconditioning and transportation costs. Inventories including parts and
accessories are valued at the lower of cost (first-in, first-out) or market.
The Company compares its inventory values to current market values on a monthly
basis and makes adjustments when necessary.
Property and Equipment
Property and equipment are carried at cost. Expenditures for major additions and
improvements are capitalized, while minor replacements, maintenance and repairs
are charged to expense as incurred. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in the Consolidated Statement of
Income.
Depreciation is computed using the straight line method for financial reporting
purposes, and modified accelerated cost recovery system for income tax purposes.
For both methods, the useful lives are 5-7 years.
Deferred income taxes on the difference between tax and book depreciation is
insignificant.
F-8
<PAGE>
Property and Equipment (Cont'd.)
A summary of property and equipment at December 31, 1998 is as follows:
Furniture, fixtures and equipment $ 67,402
Machinery and equipment 24,685
Leasehold improvements 19,166
--------
Subtotal 111,253
Less: accumulated depreciation (47,600)
--------
$ 63,653
========
Intangible Assets
Intangible assets consist primarily of the cost of the acquired business in
excess of the fair value of the net tangible assets acquired (goodwill). These
costs also include copyrights, trademarks and customer lists.
The intangible assets were being amortized over 15 years, straight line method,
for both financial reporting and federal income taxes.
During 1998, the Company had significant losses from operations resulting in
limited cash flow and was unable to market its video courses. Management
reviewed its intangible assets for impairment based on assessments of future
operations and recorded an impairment loss of $405,000.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Advertising
Advertising costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Accordingly, deferred income would be provided to
show the effect of temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
F-9
<PAGE>
The acquired business in 1998, which was accounted for under the
pooling-of-interests method of accounting was an S corporation for income tax
purposes. The S corporation status of this company was terminated in 1998. For
purposes of these consolidated financial statements, federal and state income
taxes have been recorded as if this company had filed a conventional C
corporation tax return for the pre-acquisition periods.
The components of the provision for income taxes for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
RESTATED
-------------------
1998 1997
-------- ---------
<S> <C> <C>
Current:
Federal............................ $ 88,600 -0-
State.............................. 13,400 -0-
-------- ---------
Provision for income taxes............. $102,000 -0-
======== =========
</TABLE>
A reconciliation of income taxes reported on pretax income at statutory
rates to actual income tax expenses for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1998 % 1997 %
-------- ------ ---- ---
<S> <C> <C> <C> <C>
Income tax at statutory rates............... $(25,782) (34.0) -0- 0
State income taxes, net of
federal tax benefit....................... (2,750) (3.6) -0- 0
Non-deductible expenses..................... 37,000 48.8 -0- 0
Increase in allowance for loan losses....... 96,400 127.1 -0- 0
Other....................................... (2,868) (3.8) -0- 0
-------- ------ ---- ---
Total income tax expense.................... $102,000 134.5 -0- 0
</TABLE>
As of December 31, 1997, the Company had approximately $210,000 of net operating
loss carryforwards which can be utilized to offset future taxable income through
2012. Due to the acquisition of Automax, the use of these prior losses are
doubtful and a full valuation allowance has been established.
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced sale or liquidation.
At December 31, 1998, the Company's financial instruments included cash,
receivables, accounts payable, and borrowings.
F-10
<PAGE>
At December 31, 1998, the fair values of the above financial instruments
approximated carrying values because of the short-term nature of these
instruments.
Earnings (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which simplifies the standards for computing earnings
per share ("EPS") previously found in APR No. 15, "Earnings Per Share". It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
The Company adopted SFAS No. 128 in 1997 and its implementation did not have a
material effect on the financial statements. EPS has been restated for all prior
periods presented.
Basic and dilutive net income (loss) per common share is based on the net income
(loss) divided by the weighted average number of common shares outstanding
during each year.
The Company's potential issuable shares of common stock pursuant to outstanding
stock purchase warrants and employee stock options are excluded from the
Company's diluted computation as their effect would be antidilutive. However,
the Company's convertible debentures are included in the computation of diluted
earnings per share since they are dilutive.
NOTE 2 - LONG-TERM DEBT
The Company has a promissory note to American Video Language Institute, Inc.,
due in 72 monthly payments, at approximately $8,500 per month, including
interest at prime plus 1%. The note matures on September 15, 2001. The note is
collateralized by all assets of the parent company.
Maturities of long-term debt for each of the next three years are as follows:
Year Ending
December 31 Amount
----------- ------
1999 $ 168,394
2000 76,095
2001 60,202
---------
Total 304,691
Current portion (168,394)
---------
Long-term portion $ 136,297
=========
F-11
<PAGE>
Due to Related Parties
The Company has non-interest bearing open loans with various shareholders in
the amount of $2,152,220 at December 31, 1998. The loan from Mr. Wulwick of
$37,507 outstanding as of December 31, 1998 was non-interest bearing and
open. The loan from Mr. Parkoff of approximately $2.1 million calls for
principal payments of $20,000 per month commencing November 1, 1998 and on
the first day of each month thereafter. The note matures on March 1, 2009.
The note was non-interest bearing on March 1, 1999 at which time interest is
payable at prime plus 1/2%. For the year ended December 31, 1998, interest
expense of $137,731 was imputed along with a corresponding credit to
additional paid in capital. This charge is in accordance with staff
accounting Bulletin Topics 1B and 5T. Interest was calculated at prime plus
1/2%.
The company was in default with the above principal payments and has obtained a
waiver from the Holder while the terms are being renegotiated.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space under operating leases. Future minimum lease
obligations regarding operating leases are approximately:
Year Ending
December 31 Amount
----------- ------
1999 $ 200,000
2000 202,000
2001 205,000
2002 186,000
2003 25,000
---------
$ 818,000
=========
Contingencies
On June 10, 1998, a customer of the Company test drove one of the automobiles
and ran into a pole injuring the passenger. The passenger sustained a broken
neck and is presently making a claim against the Company's insurance company.
There is presently no pending litigation in this matter.
NOTE 4 - STOCKHOLDERS EQUITY
In July, 1997, the Company entered into an agreement with a marketer to assist
the Company in opening a Canadian office. The Company paid a $10,000 fee and
issued 100,000 shares of restricted common stock as part of the agreement. At
the time of the agreement, the Company's common stock, because of its sustained
losses, had no market value. Accordingly, the Company recorded the above
restricted shares at par value.
In late 1997, pursuant to a private placement, the Company sold 28,070 units at
$3.50 per unit. Each unit consisted of one share of common stock and one warrant
entitling the holder to purchase one share of common stock at $3.90 per share
until March 10, 2002. These warrants are subject to redemption by the Company,
on not less than thirty days notice, at $.05 per warrant. No warrants have been
exercised.
F-12
<PAGE>
NOTE 4 - STOCKHOLDERS EQUITY (Cont'd.)
During 1998, the Company entered into an agreement with several companies to
assist in the public relations of the Company. The Company issued 187,000 shares
of stock for various services rendered. Although the stock was trading at an
average of $.50 share, these shares were recorded at $.10 per share. The
majority of these shares were restricted.
During 1998, the Company sold 117,466 share of stock at $3.50 per share.
NOTE 5 - EMPLOYEE STOCK OPTIONS
In January 1997, the shareholders approved the adoption of the 1997 stock option
plan (The "Plan"). The Plan provided for the granting of a maximum 500,000
options.
In January, 1997, the Board of Directors granted to key employees, officers, and
directors, 360,800 incentive options under the plan. The vested employees may
purchase the shares at an exercise price of $3. There was no market value at the
time of the grant. The expiration date of the options are five years from the
date of the grant. The following is a summary of outstanding stock options:
December 31,
------------
1998 1997
---- ----
Number of Option Number of Option
Shares Price Shares Price
------ ----- ------ -----
Beginning of Year 360,800 $ 3.00 360,800 $ 3.00
Cancelled (60,800) (3.00) 0 0
Granted 0 0 0 0
------- ------ ------- ------
End of year 300,000 $ 3.00 360,800 $ 3.00
======= ====== ======= ======
During May 1999, the Board of Directors adjusted the exercise price of the
options already granted to the various officers and directors to the then
current market rate of $.4375 from $3.00, and granted an additional 300,000
options.
NOTE 6 - CONVERTIBLE DEBENTURES
During July, 1998, the Company sold 1% convertible debentures of $175,000.
The debentures are due July 2001.
During the year, holders converted $157,500 of the debentures into 229,532
shares of the Company's common stock.
F-13
<PAGE>
NOTE 6 - CONVERTIBLE DEBENTURES (Cont'd.)
Also, during 1998, the Company sold 8% convertible debentures of $225,000. The
debentures are due September 2001. There were no conversions during the year.
The above debentures may be converted at any time into common stock at
approximately 80% of the average closing bid of the common stock. The
discount (interest expense) on the 20% conversion feature amounted to $77,201
for 1998 which is reflected as interest expense and a credit to additional
paid in capital.
NOTE 7 - SEGMENT AND RELATED INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company's reportable
business segments are its video language business, which is selling video tapes
to individual and institutions, and the selling and financing used automobiles
in West Palm Beach, Florida.
For the Year Ended December 31, 1998
Total/
Kenwick Automax Consolidated
------- ------- ------------
Revenues $ 153,036 $ 3,800,723 $ 3,953,759
Interest Income 1,118 313,915 315,033
Interest Expense-Regular 42,804 130,357 173,161
Interest Expense-Discount 77,102 -- 77,102
Depreciation and
Amortization 65,088 6,199 71,287
Net Income (loss) (567,786) 389,958 (177,828)
Total Assets 186,561 3,459,941 3,646,502
For the Period Ended December 31, 1997 (unaudited)
Automax
from inception
(July 1997)
Kenwick through Dec. 31, Total
12 mos. ended 1997)(Unaudited) Consolidated
------------- ---------------- ------------
Revenues $ 739,950 $1,371,786 $2,111,736
Interest income -- 7,311 7,311
Interest expense 33,790 -- 33,790
Depreciation and
amortization 51,992 -- 51,992
Net Income (loss) (223,401) (93,424) (316,825)
F-14
<PAGE>
NOTE 8 - SUBSEQUENT EVENTS
In 1999, the Company sold additional 8% convertible debentures of $600,000.
In 1999, the Company entered into a consulting agreement whereby the Company
would issue approximately 80,000 shares of common stock at prices ranging from
$1.50 to $2.50 per share.
Also, in 1999, the Company entered into an investment banking agreement where by
the Company issued a warrant to purchase 25,000 shares of common stock at $.01.
The warrant expires on June 7, 2006.
NOTE 9 -- RESTATEMENT
The financial statements for the year ended December 31, 1998 have been
restated to conform to various Staff Accounting Bulletins of the securities
and Exchange Commission.
The following adjustments are as follows:
1. Interest expense of $130,357 on the non-interest bearing
shareholder loans per Bulletin Topics 1B and 5T with a
corresponding credit to additional paid in capital.
2. Interest expense of $77,102 incurred which reflects the 20%
discount feature on the convertible debentures per EITF D-60 and
EITF 95-5 with a corresponding credit to paid in capital.
3. Imputed officers' salaries of $50,000 with a corresponding credit
to paid in capital.
The effect of the above adjustments are as follows:
<TABLE>
<S> <C> <C>
A) Decrease to income from operations- $257,459
B) Decrease to income tax expense- $ 34,700
C) Decrease to net income- $222,759
E) Decrease to earnings (loss) per share:
Basic: $ (.06)
Diluted: $ (.05)
</TABLE>
F-15
<PAGE>
KENWICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED
(UNAUDITED)
FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30
F-16
<PAGE>
KENWICK INDUSTRIES, INC.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1999 1998
---------- ----------
<S> <C> <C>
Cash $ 147,974 $ 131,469
Installment loans receivable, net 4,359,823 2,359,247
Inventory 1,310,706 1,112,019
Property and equipment, net 106,891 64,087
Intangible assets 142,056 522,659
Security deposits and other assets 56,037 12,144
---------- ----------
TOTAL ASSETS $6,123,487 $4,201,625
========== ==========
Accounts payable and accrued expenses $424,660 $ 680,460
Payroll tax payable 54,347 63,510
Due to related parties 2,291,976 2,222,120
Note payable 257,691 320,310
Convertible debentures 526,350 356,000
Income tax payable 593,781 108,882
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 5,445,600 and 3,806,700 shares
issued and outstanding at September 30, 1999
and 1998, respectively 54,456 38,067
Additional paid in capital 1,781,025 669,626
Retained earnings (deficit) 139,201 (257,350)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,123,487 $4,201,625
========== ==========
</TABLE>
Notes to financial statements are an integral part of this statement.
F-17
<PAGE>
KENWICK INDUSTRIES, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------- ----------
<S> <C> <C>
NET SALES............................................. $4,297,777 $2,978,641
COST OF GOODS SOLD.................................... 2,957,542 1,825,109
---------- ----------
GROSS PROFIT.......................................... 1,340,235 1,153,532
INTEREST AND OTHER INCOME............................. 1,647,959 236,470
---------- ----------
INCOME BEFORE OPERATING EXPENSES...................... 2,988,194 1,390,002
---------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising...................................... 41,864 57,956
Provision for doubtful accounts.................. 369,956 319,821
Depreciation and amortization.................... 25,326 57,604
Interest......................................... 173,829 132,627
Insurance........................................ 51,810 25,415
Rent............................................. 167,774 139,176
Salaries and commissions......................... 328,290 37,203
Officers and salaries............................ 41,045 81,041
Other general & administrative expenses.......... 496,758 200,789
---------- ----------
Total general and administrative expenses............. 1,696,652 1,051,632
---------- ----------
INCOME FROM OPERATIONS................................ 1,291,542 338,370
OTHER EXPENSES
Interest - discount on convertible debentures.... 62,090 66,165
Impairment loss.................................. -- --
---------- ----------
Total other expenses.................................. 62,090 66,165
---------- ----------
INCOME BEFORE INCOME TAXES............................ 1,229,452 272,205
INCOME TAXES.......................................... 491,781 108,882
---------- ----------
NET INCOME............................................ $ 737,671 $ 163,323
========== ==========
BASIC EARNINGS PER SHARE:
Weighted average shares outstanding.............. 4,845,624 3,829,445
========== ==========
Earnings per share:
Income from operations...................... $ 0.27 $ 0.09
========== ==========
Net income.................................. $ 0.15 $ 0.04
========== ==========
DILUTED EARNINGS PER SHARE:
Adjusted weighted average shares outstanding..... 5,683,124 3,831,065
========== ==========
Earnings per share:
Income from operations...................... $ 0.23 $ 0.09
========== ==========
Net income.................................. $ 0.13 $ 0.04
========== ==========
</TABLE>
Notes to financial statements are an integral part of this statement.
F-18
<PAGE>
KENWICK INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 737,671 $ 163,323
Adjustments to reconcile net income to cash (used in)
operating activities:
Depreciation and amortization 25,326 57,604
Conversion of convertible debt to common stock 746,920 378,052
Impairment loss -- --
Interest-discount on convertible debentures 62,090 66,165
Issuance of common stock for services -- --
(Increase) in accounts receivable (1,805,919) (1,771,041)
(Increase) in security deposits and other assets (554,042) (6,920)
(Increase) in inventory (209,067) (562,465)
Increase in accounts payable 17,522 163,920
Increase/(decrease) in payroll tax payable (14,914) 13,968
Increase in income tax payable 491,781 108,882
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (502,632) (1,388,512)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (54,510) (24,843)
Proceeds from (to) intangible assets (340) 4,358
----------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (54,850) (20,485)
----------- -----------
FINANCING ACTIVITIES
Principal reduction in note payable (47,000) (2,609)
Sale of debenture bonds 317,949 356,000
Increase in contributed capital 1,520 135,268
Increase in related party loans 442,298 1,301,056
Cost incurred in private placement (21,348) --
Sale of common stock -- --
----------- -----------
NET CASH PROVIDED IN FINANCING ACTIVITIES 693,419 1,519,715
----------- -----------
NET INCREASE IN CASH 135,937 110,718
CASH AT THE BEGINNING OF THE YEAR 12,037 20,751
=========== ===========
CASH AT THE END OF THE PERIOD $ 147,974 $ 131,469
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 26,762 $ --
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
F-19
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals), which are necessary for a fair presentation of the results
for the periods presented. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the Company's Annual Report for the year ended December 31, 1998. The
results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Company operates in two business segments:
In August 1995, upon organization, the Company acquired the assets of American
Video Language Institute, Inc. These assets consisted of the trade name,
trademarks and copyrights needed to produce the English language courses. The
cost of the acquisition was $725,000, which exceeded the fair value of the net
tangible assets acquired by $655,000.
In August 1998, the Company acquired all of the issued and outstanding shares of
the common stock of Automax USA, Inc., Automax International, Inc. and Automax
USA Finance, Inc. (collectively referred to as "Automax") in exchange for
1,000,000 shares of Kenwick's common stock. This acquisition is being accounted
for by the pooling-of-interest method. These financial statements have been
restated to reflect the acquisition.
Automax is a Florida corporation organized in 1997, and is engaged in the
business of buying, selling and financing used cars in West Palm Beach, Florida.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
The Company and its subsidiaries utilizes the accrual basis of accounting. Sales
are recorded when products are shipped or when cars are delivered. The Company
recognizes Interest on its installment loans receivable over the term of the
loan using the interest method.
F-20
<PAGE>
Installment Loans Receivable
The installment loans receivable are stated at the amount of unpaid principal
reduced by an allowance for doubtful accounts as follows:
Automax Kenwick Combined
------- ------- --------
Retail Trade Receivables $ 5,087,726 $ 1,519 $ 5,089,245
Less: allowance for doubtful accounts (729,422) -- (729,422)
------------ -------- ------------
$ 4,358,304 $ 1,519 $ 4,359,823
============ ======== ============
The receivables are collateralized by automobiles. If payments are delinquent,
the Company repossesses the automobiles which are then resold.
The allowance for doubtful accounts is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The Company makes
continuous credit reviews of the loan portfolios and considers current economic
conditions, review of specific problem loans, and other factors in determining
the adequacy of its allowances. The Company's charge-off policy is based on a
loan-by-loan review. Since the Company has a short history, historical
information is being developed.
Inventories
Kenwick's inventories consist of blank and completed video tapes and shipping
materials. Inventories are stated at the lower of cost (determined on a
first-in-first-out basis) or market.
Automax's inventories consist of used automobiles held for sale using the
specific identification method. Cost includes acquisition expenses, including
reconditioning and transportation costs. Inventories including parts and
accessories are valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are carried at cost. Expenditures for major additions and
improvements are capitalized, while minor replacements, maintenance and repairs
are charged to expense as incurred. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in the Consolidated Statement of
Income.
Depreciation is computed using the straight line method for financial reporting
purposes, and modified accelerated cost recovery system for income tax purposes.
For both methods, the useful lives are 5-7 years.
Deferred income taxes on the difference between tax and book depreciation is
insignificant.
F-21
<PAGE>
A summary of property and equipment at September 30, 1999 is as follows;
Furniture, fixtures and equipment $ 85,309
Machinery and equipment 26,834
Leasehold improvements 53,619
---------
Subtotal 165,762
Less: accumulated depreciation (58,871)
---------
106,891
=========
Intangible Assets
Intangible assets consist primarily of the cost of the acquired business in
excess of the fair value of the net tangible assets acquired (goodwill). These
costs also include copyrights, trademarks and customer lists.
The intangible assets were being amortized over 15 years, straight line method,
for both financial reporting and federal income taxes.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Advertising
Advertising costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, deferred income would be provided to
show the effect of temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
F-22
<PAGE>
The acquired business in 1998, which was accounted for under the
pooling-of-interests method of accounting was an S corporation for income tax
purposes. The S corporation status of this company was terminated in 1998. For
purposes of these consolidated financial statements, federal and state income
taxes, have been recorded as if this company had filed a conventional C
corporation tax return for the pre-acquisition periods.
The components of the provision for income taxes for the six months ended
September 30 are as follows;
1999 1998
Current:
Federal $418,014 $ 92,550
State 73,767 16,332
-------- --------
Provision for income taxes $491,781 $108,882
======== ========
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced sale or liquidation.
At September 30, 1999, the Company's financial instruments included cash,
receivables, accounts payable and borrowings.
At September 30, 1999, the fair values of the above financial instruments
approximated carrying values because of the short-term nature of these
instruments.
Earnings (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statements No.
128, "Earnings Per Share", which simplifies the standards for computing earnings
per share ("EPS") previously found in APR No. 15, "Earnings Per Share". It
replaces the presentation of primary EPS with a presentation basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
The Company adopted SFAS No. 128 in 1997 and its implementation did not have a
material effect on the financial statements. EPS has been restated for all prior
periods presented.
Basic and dilutive net income (loss) per common share is based on the net income
(loss) divided by the weighted average number of common shares outstanding
during each year.
The Company's potential issuable shares of common stock pursuant to outstanding
stock purchase warrants and employee stock options are excluded from the
Company's diluted
F-23
<PAGE>
computation as their effect would be antidilutive. However, the Company's
convertible debentures are included in the computation of diluted earnings per
share since they are dilutive.
NOTE 3 - DUE TO RELATED PARTIES
The Company has loans with various shareholders in the amount of $2,291,976
and $2,222,120 at September 30, 1999 and September 30, 1998 respectively. The
note calls for principal payments of $20,000 per month commencing November 1,
1998 and on the first day of each month thereafter. The note matures on March
1, 2009. The notes were non-interest bearing until March 1, 1999, at which
time interest is payable at prime plus 1/2%. For the two months, January and
February 1999, interest expense of $36,590 was imputed along with a
corresponding credit to additional paid in capital. This charge is in
accordance with Staff Accounting Bulletin Topics 1B and 5T. Interest was
calculated at prime plus 1/2%.
The Company is in default regarding the above payments and has obtained a
waiver from the Holder while the terms are being renegotiated.
F-24
<PAGE>
DESCRIPTION OF EXHIBITS
The following Exhibits are filed pursuant to Item 601 of Regulation S-B.
Exhibit No. Description
----------- -----------
3. Articles of Incorporation and By-laws
3.1* Articles of Incorporation of Kenwick Industries, Inc., effective
July 7, 1995
3.2* Articles of Amendment of Kenwick Industries, Inc., filed July 30,
1998
3.3* Articles of Amendment of Kenwick Industries, Inc., filed June 31,
1999
3.4* Articles of Incorporation of Automax USA, Inc., filed January 1,
1997
3.5* Articles of Incorporation of Automax USA Finance, Inc., filed June
3, 1997
3.6* Articles of Incorporation of Automax International, Inc., filed June
16, 1998
3.7* By-Laws of Kenwick Industries, Inc., as of November 10, 1999
4. Instruments Defining the Rights of Security Holders
4.1* Series A Convertible Debenture, July 16, 1998
4.2* Series B Convertible Debenture, September 16, 1998
4.3* Series C Convertible Debenture, November 20, 1998
4.4* Series D Convertible Debenture, February 1, 1999
4.5* Series E Convertible Debenture, February 22, 1999
4.6* Series F Convertible Debenture, March 28, 1999
4.7* Series G Convertible Debenture, July 22, 1999
4.8* Series H Convertible Debenture, September 21, 1999
4.9* Series I Convertible Debenture, January 6, 2000
10. Material contracts
10.1* Licensing Agreement with Integrated English International, Inc.,
dated January 9, 1997
10.2* Distribution Sub-Licensing Agreement with Integrated English
International, Inc., dated June 15, 1998
10.3* Distribution License Agreement with Philips Consumer Electronics,
B.V., dated August 31, 1998
10.4* Stock Exchange Agreement with Automax International, Inc., et al.,
dated August 20, 1998
10.5* Lease of 2172 North Military Trail, West Palm Beach, Florida by
Automax USA, Inc., dated June 7, 1997
10.6* Lease of 2110 North Military Trail, West Palm Beach, Florida by
Andrea Parkoff and Michael Parkoff, dated August 1, 1999
10.7* Sublease of 2110 North Military Trail, West Palm Beach, Florida by
Andrea Parkoff and Michael Parkoff to Automax USA, Inc., dated
August 1, 1999
10.8* 1997 Stock Option Plan
10.9* Landlord's Consent to Sublease 2455 E. Sunrise Boulevard, Suite 512,
Fort Lauderdale, Florida, dated December 28, 1999
10.10*Lease of 660 Linton Boulevard, Suite 202, Delray Beach, Florida,
effective January 7, 2000.
* Previously filed
25
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on behalf by the
undersigned, thereunto duly authorized.
KENWICK INDUSTRIES, INC.
(Registrant)
Date: July 26, 2000
By:
/s/ Kenneth S. Wulwick
---------------------------
Kenneth S. Wulwick Chief Executive Officer, President and Director
/s/ Sheldon Glickman
---------------------------
Sheldon Glickman Senior Vice President, Sales and Marketing and
Director
/s/ Margaret Nabridge
---------------------------
Margaret Nabridge Senior Vice President, Planning, Secretary and
Director
26
