<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1998
--------------------------------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
--------------------- ------------------------
Commission file number 0-15324
----------------------------------------------------------
Eye Technology, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1402131
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16 South Market Street, Petersburg, Virginia 23803
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(804) 861-0681
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,669,740 shares of Common
Stock, $.01 par value, 250 shares of Class A Convertible Preferred Stock
(convertible into 20,000 shares of Common Stock), 13,756 shares of Series B
Convertible Preferred Stock (convertible into 45,118,720 shares of Common
Stock), outstanding as of June 30, 1998
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ ]
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
An index to the financial statements of the Company filed as a part of
this report appears at Page F-1. The financial statements of the Company appear
at Pages F-2 through F-9 of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX
MONTHS ENDED JUNE 30, 1997
The result of operations for the first six months of 1998 includes the
results of operations of Star Tobacco and Pharmaceuticals, Inc. ("Star") for the
entire period, consolidated with those of Eye Technology, Inc. ("ETI") and its
subsidiaries since the beginning of February, 1998, while results of operations
for the first six months of 1997 include only those of Star.
Net sales declined by 42.3%, or slightly more than five million
dollars, from the first six months of 1997 to the first six months of 1998,
which includes sales of $390,000 of ETI. The decline in sales is attributed to:
(i) the loss of contract manufacturing business, primarily sales to Swisher
International, Inc. for the manufacture of small cigars, which declined from
2.673 million dollars in the 1997 period to less than $20,000 in the 1998
period; (ii) declining sales of Star brand cigarettes due to management's
decision to de- emphasize high-volume, low margin sales in favor of higher
margin sales which resulted in lower sales volume; and (iii) an emphasis within
Star of management attention to development of its tobacco processing
technology.
Costs of goods sold ("COGS") declined as a percentage of sales from
47.9% in the first half of 1997 to 44.7% in the first half of 1998. The
percentage decline reflects improvements in manufacturing efficiencies and
product configurations, as well as an increase in average profit margins per
sale due to higher average selling prices in the 1998 period compared to the
1997 period. These improvements were slightly offset by COGS of 76% in the
Company's ETI operations.
Excise taxes, as a percentage of sales, increased from 36.4% in the
first half of 1997 to 43.2% in the first half of 1998. The increase is
attributable primarily to the fact that no federal tobacco excise taxes were
payable by Star on its sales of little cigars to Swisher International, Inc. The
1997 period also included a one-time export transaction on which no excise taxes
were payable.
As a result of the above-described factors, gross profit margins of the
Company declined from 15.7% in the 1997 period to 12.1% in the 1998 period.
Marketing and distribution expenses remained essentially the same in
the two fiscal periods being compared, but, as a percentage of sales, this
category of expense increased from 4.7% in 1997 to 8.3% in 1998. The percentage
increase is attributable to three factors: (1) the effect of relatively fixed
overhead costs, which become a larger percentage of sales as sales volume
declines; (2) expenses incurred in the introduction in the first quarter of 1998
to a new product introduced by the Company; and (3) to a revised method of
compensating sales persons which resulted in higher selling expense.
General and administrative expenses increased significantly from the
first half of 1997 to the first half of 1998 - from $780,399, or 6.6% of sales,
in 1997 to $1,220,020, or 17.8% of sales in 1998. The 1998 figure includes
$218,281 incurred at ETI. The increases are also due to the following factors:
(1) substantially higher legal and accounting expenses due primarily to the
Company's need to bring itself into compliance with Securities and Exchange
Commission reporting requirements following the "reverse acquisition" of ETI by
Star in February, 1998; (2) increased management compensation expense related to
2
<PAGE> 3
the hiring of a new chief executive officer, and (3) goodwill expense in 1998 of
$124,000 resulting from the "reverse acquisition" transaction. Moreover, the
percentage increase may be attributed in part to the fact that relatively fixed
expenses constitute a higher proportion of a lesser sales figure.
Research and development expenses increased from $521,398 in the first
half of 1997 to $702,058. All of these expenses, 100% of which were incurred by
Star and not ETI, are related to the development of the Company's proprietary
technology for the elimination of nitrosamines from tobacco, and were not
related to the Company's revenue-producing operations in the two periods of 1997
and 1998 being compared.
The expense of $298,530 included under "Other" in the six-month period
of 1998 reflects primarily a non-recurring loss resulting from a sale of surplus
cigarette manufacturing equipment in the second quarter of 1998.
The extraordinary gain in 1998 of $735,612 reflects settlements with
various creditors of ETI entered into at the time of the "reverse acquisition"
transaction between Star and ETI in February, 1998.
As a result of all of the above factors, the Company's net loss
increased from $104,110 in the first half of 1997 to $1,382,311 in the first
half of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet at June 30, 1998, reflects an illiquid
position with a current asset-to- liability ratio of 1 - 2.45. Operations at
Star have been financed over the past several years primarily through increases
in accounts payable, accrued expenses and borrowed funds from institutional
lenders. In the first six months of 1998, borrowings were reduced (partially
through an equipment sale described above) and the Company's dependence on trade
debt and other short-term indebtedness increased. The Company's liquidity has
significantly improved, however, by the receipt of 2.5 million dollars from an
equity private placement in July, 1998, described below.
Throughout 1998 until early July, the Company maintained with a bank a
revolving line-of-credit pursuant to which borrowings of up to 1.5 million
dollars were available to the Company with advances limited by formula to
specified levels of accounts receivable and inventory of the Company's tobacco
products business. This credit facility was due to expire on June 30, 1998. The
Company was in default of certain financial covenants but not in any of the
loan's repayment terms. In early July, 1998, the bank loan was assigned to a
different bank, the loan terms were modified with the term being extended to
January 1, 1999, and existing defaults being waived.
"Intangibles" reflects primarily the recording of $1,231,000 of
goodwill incurred in the Company's February, 1998 "reverse acquisition"
transaction. This item is being amortized over a five-year period at the rate of
$246,000 per year, or $62,000 per quarter.
In March 1998, 2,320 shares of Class A Preferred Stock (listed as
"Redeemable preferred stock" on the balance sheet) were converted into 232,000
shares of Common Stock of the Company. As of February 9, 1998, the Company sold
an additional 2,900,000 shares of Common Stock in a private placement for
$1,450,000. The proceeds were used primarily to reduce indebtedness originally
incurred for working capital purposes, including research and development. A
portion of the funds received by the Company from this private placement,
together with issuance of Common Stock in satisfaction of accrued indebtedness,
resulted in a reduction of outstanding indebtedness of the Company of
approximately $700,000.
In July, 1998, the Company sold to a single institutional investor
2,500,000 shares of Common Stock, 763 shares of Series B Preferred Stock
convertible into 2,502,640 shares of Common Stock, and a one-year warrant to
purchase 500,000 shares of Common Stock of the Company at a price of $2.00 per
share for a total price of $2,500,000. Simultaneously with that transaction,
certain controlling stockholders of the Company contributed to the Company 1,144
shares of Series B Preferred Stock convertible into 3,752,320
3
<PAGE> 4
shares. The net effect of these capital stock transactions was the receipt by
the Company of $2,500,000 and the increase of outstanding capital stock of
1,250,330 shares of Common Stock on a fully-diluted basis. The Company will use
the proceeds of this equity financing primarily for continued research and
development of Star's technology for the removal from tobacco of
tobacco-specific nitrosamines and for the acquisition of tobacco-processing
equipment. See "Business of Star."
With the extension of the Company's bank loan and receipt of equity
funds described above, the Company believes that it has adequate working capital
for the remainder of 1998, including funds to conduct the pilot program for the
processing of tobacco described in "Business of Star." The Company will
continue, however, to seek to obtain additional capital financing to assure that
its research and development activities and activities to commercialize its
proprietary tobacco-processing technology are not constrained by a lack of
working capital or by the cash needs of its operating businesses. There can be
no assurances that the Company will be able to obtain additional capital
financing or that it can obtain such financing on favorable terms.
4
<PAGE> 5
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1998, the Company sold to a single institutional investor
2,500,000 shares of Common Stock, 763 shares of Series B Preferred Stock
convertible into 2,502,640 shares of Common Stock and a one-year warrant to
purchase 500,000 shares of Common Stock at $2.00 per share for a total order of
$2,500,000. Simultaneously with that transaction, certain controlling
stockholders of the Company contributed to the Company 1,144 shares of Series B
Preferred Stock convertible into 3,752,320 shares of Common Stock. The proceeds
of this private placement were used forwarding capital and general corporate
purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's subsidiary, Star Tobacco and Pharmaceuticals, Inc., had a
revolving line of credit with a bank pursuant to which the Company could borrow
funds based upon a formula related to specified levels of accounts receivable
and inventory. The loan was secured by all of the assets of Star and was
guaranteed by ETI, on this line of credit facility as well as by certain major
stockholders of the Company. Star was in default of certain financial covenants
at June 30, 1998 and during the preceding two years. Star was never in default
in the payment of any principal or interest on this line of credit facility. See
Item 2, "Financial Condition," of Part I of this Report regarding the assignment
and modification of this line of credit to a new lender in July 1998. The
default was waived by the lender.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K on July 10, 1998.
5
<PAGE> 6
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EYE TECHNOLOGY, INC.
Date: August 14, 1998 /s/ David P. Sheets
--------------------------------------
President and Chief Executive Officer
6
<PAGE> 7
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
Condensed Consolidated Balance Sheet dated June 30, 1998 F-2
Condensed Consolidated Statements of Operations F-4
for the Three Month Periods Ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows F-5
for the Three Month Periods Ended June 30, 1998 and 1997
Notes to Unaudited Condensed Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 8
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
Assets (Unaudited) 1997
------ ----------- ------------
<S> <C> <C>
Current assets:
Cash $ 13,367 $ 10,929
Accounts receivable 736,804 775,168
Inventories 1,654,248 605,392
Other current assets 143,239 89,989
---------- ----------
Total current assets 2,547,658 1,481,478
---------- ----------
Property and equipment, net 1,655,737 2,415,632
---------- ----------
Other assets:
Intangibles, net of amortization 1,449,229 157,557
Other assets 118,172 64,969
---------- ----------
Total other assets 1,567,401 222,526
---------- ----------
$5,770,796 $4,119,636
========== ==========
</TABLE>
See notes to condensed consolidated financial statements. F-2
<PAGE> 9
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
Liabilities and Stockholders' Deficit (Unaudited) 1997
------------------------------------- ----------- ------------
<S> <C> <C>
Current liabilities:
Notes payable - current $ 1,380,339 $ 1,942,085
Accounts payable 3,733,537 2,735,686
Accrued expenses 1,136,051 85,108
----------- -----------
Total current liabilities 6,249,927 4,762,879
Notes payable, less current maturities 809,086 1,099,242
----------- -----------
Total liabilities 7,059,013 5,862,121
----------- -----------
Commitments and contingencies
Redeemable preferred stock 25,000 --
----------- -----------
Stockholders' deficit:
Preferred stock 168 --
Common stock 71,698 383,557
Additional paid-in capital 3,127,877 1,004,607
Accumulated deficit (4,512,960) (3,130,649)
----------- -----------
Total stockholders' deficit (1,313,217) (1,742,485)
----------- -----------
$ 5,770,796 $ 4,119,636
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements. F-3
<PAGE> 10
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 3,768,129 $ 5,707,981 $ 6,837,765 $ 11,909,260
Cost of goods sold 1,548,962 2,598,989 3,053,965 5,710,139
Excise taxes on products 1,718,143 2,147,493 2,954,950 4,333,709
------------ ------------ ------------ ------------
Gross profit 501,024 961,499 828,850 1,865,412
------------ ------------ ------------ ------------
Operating expenses:
Marketing and distribution expenses 258,938 252,269 569,058 564,427
General and administrative expenses 824,202 344,757 1,220,010 780,399
Research and development 454,748 250,636 702,058 521,398
------------ ------------ ------------ ------------
Total operating expenses 1,537,888 847,662 2,491,126 1,866,224
------------ ------------ ------------ ------------
Operating income (loss) (1,036,864) 113,837 (1,662,276) (812)
Other income (expenses):
Other (284,967) 2,979 (298,536) 15,830
Interest expense (80,126) (63,808) (157,111) (119,128)
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (1,401,957) 53,008 (2,117,923) (104,110)
Extraordinary gain from extinguishment of debt
(no applicable income taxes) -- -- 735,612 --
------------ ------------ ------------ ------------
Net income (loss) $ (1,401,957) $ 53,008 $ (1,382,311) $ (104,110)
============ ============ ============ ============
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary item $ (.17) $ 265 $ (.36) $ (521)
Extraordinary item $ -- $ -- $ .12 $ --
Net income (loss) $ (.17) $ 265 $ (.24) $ (521)
Weighted average number of shares 8,013,696 200 5,850,000 200
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements. F-4
<PAGE> 11
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(1,382,311) $ (104,110)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and other non-cash charges 695,809 211,735
Extraordinary gain from extinguishment of debt (735,612) --
(Increase) decrease in current assets (116,305) 1,017,672
(Decrease) increase in current liabilities 1,055,531 (540,110)
----------- -----------
Net cash provided (used) by operating activities (482,888) 585,187
----------- -----------
Investing activities:
Purchases of property and equipment (98,500) (432)
Purchases of intangible assets (460) --
Proceeds from sale of property and equipment 175,000 --
----------- -----------
Net cash provided (used) by investing activities 76,040 (432)
----------- -----------
Financing activities:
Proceeds from notes payable 48,500 137,972
Proceeds from capital contribution 1,488,679 --
Payments on notes payable (1,127,893) (644,996)
Stockholder distributions -- (77,401)
----------- -----------
Net cash provided (used) by financing activities 409,286 (584,425)
----------- -----------
Increase in cash 2,438 330
Cash, beginning of period 10,929 10,584
----------- -----------
Cash, end of period $ 13,367 $ 10,914
=========== ===========
Cash paid for:
Interest $ 140,631 $ 126,887
</TABLE>
See notes to condensed consolidated financial statements. F-5
<PAGE> 12
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Condensed Consolidated Statements of Cash Flows, Continued
For the Six Months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Non-cash investing and financing activities:
Repayment of related party note payable with
related party note receivable $ -- $ 759,439
Conversion of related party note payable to equity $ -- $ 923,499
Conversion of redeemable preferred stock to equity $ 232,000 $ --
Notes payable reduced by proceeds from equipment sale $ 255,000 $ --
Issuance of common stock as compensation $ 90,900 $ --
Acquisition:
Fair value of assets acquired $1,237,134 $ --
Liabilities assumed 2,468,366 --
---------- ----------
Excess assigned to goodwill $1,231,232 $ --
========== ==========
</TABLE>
See notes to condensed consolidated financial statements. F-6
<PAGE> 13
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Basis of presentation:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The results of operations for the three months and six months ended
June 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
B. Description of acquisition:
On February 6, 1998, Eye Technology, Inc. and Subsidiaries, a
publicly-owned company, entered into a stock exchange agreement with
Star Tobacco & Pharmaceuticals, Inc., a privately-owned company. Under
the agreement, Star Tobacco & Pharmaceuticals, Inc. exchanged all of
its common stock for 13,831 shares of Series B convertible voting
preferred stock, par value $.01 per share. When converted this stock
would equal 45,365,680 shares of common stock, approximately 90% of the
outstanding common stock of Eye Technology, Inc. and Subsidiaries as of
the transaction date.
APB No. 16, paragraph 70 states that presumptive evidence of the
acquiring corporation in combinations effected by an exchange of stock
is obtained by identifying the former common stockholder interest of a
combining company which either retain or receive the larger portion of
the voting rights in the combined corporation. That corporation should
be treated as the acquirer unless other evidence clearly indicates that
another corporation is the acquirer. As the former stockholders of Star
Tobacco & Pharmaceuticals, Inc. hold the larger portion of the voting
rights of the combined corporation, the transaction has been recorded
as a reverse acquisition with Star Tobacco & Pharmaceuticals, Inc. as
the accounting acquirer. In a reverse acquisition, the accounting
acquirer is treated as the surviving entity, even though the
registrant's legal existence does not change. The accounting acquirer
treats the merger as a purchase acquisition. As a result, the merger
has been recorded using the historical cost basis for the assets and
liabilities of Star Tobacco & Pharmaceuticals, Inc., as adjusted, and
the estimated fair value of Eye Technology, Inc. and Subsidiaries
assets and liabilities. The excess of Eye Technology Inc. and
Subsidiaries' liabilities assumed over assets acquired amounted to
$1,231,232 and was assigned to goodwill which is being amortized over
five years on a straight-line basis.
F-7
<PAGE> 14
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
B. Description of acquisition, continued:
The results of operations of Eye Technology, Inc. and Subsidiaries are
included in the accompanying condensed consolidated financial
statements from the date of acquisition.
The following summarized pro forma information assumes the acquisition
had occurred as of January 1, 1997.
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 6,896,658 $ 12,643,903
Operating loss $ (1,704,014) $ (224,879)
Net loss $ (1,429,096) $ (98,108)
Earnings (loss) per share:
Basic and diluted $ (.21) $ (.02)
</TABLE>
C. Income taxes:
Effective February 6, 1998, Star Tobacco & Pharmaceuticals, Inc. will
no longer be treated as an S Corporation for tax purposes and will be
subject to corporate income taxes. If the Company had been subject to
corporate income taxes during 1997 and through February 6, 1998, it
would not have any current income tax liability due to its operating
losses. Star Tobacco & Pharmaceuticals, Inc. would have a deferred
income tax asset resulting from the net operating losses and a deferred
income tax liability resulting primarily from temporary differences in
depreciation. A valuation allowance would have been established to
fully reserve the excess of the deferred tax asset over the deferred
tax liability due to the uncertainty of the utilization of the
operating loss carryforward.
D. Extraordinary item:
During the first quarter of 1998, the Company recognized an
extraordinary gain of $735,612 as the result of its extinguishment of
certain notes and trade accounts payable. Certain of the debt was
extinguished through the exchange of shares of common stock amounting
to approximately 1,238,800 shares resulting in a gain of $442,006. The
remaining gain of $293,606 resulted from negotiated settlements with
vendors. There was no income tax effect on the transactions.
F-8
<PAGE> 15
STAR TOBACCO & PHARMACEUTICALS, INC. (Note B)
(Accounting Acquirer of Eye Technology, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
E. Earnings (loss) per common share:
Earnings (loss) per common share is computed under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". Basic earnings (loss) per common share is computed by dividing
net earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common share
includes the dilutive effect of potential common shares outstanding.
The Company's potential common shares outstanding are from preferred
stock. Basic and diluted earnings (loss) per share were the same in
1998 because all potential common shares were antidilutive.
F. Related party transactions:
During the first quarter of 1998, $167,355 was advanced to related
parties. These advances were repaid during the second quarter of 1998.
G. Subsequent events:
The Company maintained a $1.5 million revolving line of credit pursuant
to which borrowings were available to the Company with advances limited
by formula to specified levels of accounts receivable and inventory.
This credit facility was to expire on March 31, 1998, but was extended
to June 30, 1998. The Company was in default of certain covenants, a
situation which has existed for over two years. In July, 1998, the
Company's bank loan arrangements were assigned to a different bank and
the loan terms were modified. As a result, the term of the loan was
extended to January 1, 1999, and existing defaults were waived.
In July 1998, the Company sold to a single institutional investor
2,500,000 shares of Common Stock, 763 shares of Series B Preferred
Stock convertible into 2,502,640 shares of Common Stock, and a one-year
warrant to purchase 500,000 shares of Common Stock of the Company at a
price of $2.00 per share for a total price of $2,500,000.
Simultaneously with that transaction, certain controlling stockholders
of the Company contributed to the Company 1,144 shares of Series B
Preferred Stock convertible into 3,752,320 shares of common stock.
F-9
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,367
<SECURITIES> 0
<RECEIVABLES> 736,804
<ALLOWANCES> 0
<INVENTORY> 1,654,248
<CURRENT-ASSETS> 143,239
<PP&E> 1,655,737
<DEPRECIATION> (466,475)
<TOTAL-ASSETS> 5,770,796
<CURRENT-LIABILITIES> 6,249,927
<BONDS> 809,086
25,000
168
<COMMON> 71,698
<OTHER-SE> 1,313,217
<TOTAL-LIABILITY-AND-EQUITY> 5,770,796
<SALES> 6,837,765
<TOTAL-REVENUES> 6,837,765
<CGS> 3,053,965
<TOTAL-COSTS> 8,500,041
<OTHER-EXPENSES> (298,536)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (157,111)
<INCOME-PRETAX> (1,382,311)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,382,311)
<DISCONTINUED> 0
<EXTRAORDINARY> 735,612
<CHANGES> 0
<NET-INCOME> (1,382,311)
<EPS-PRIMARY> (.024)
<EPS-DILUTED> (.024)
</TABLE>
