AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 1999
Registration No. 333-______________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
----------
PSI INDUSTRIES, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
Florida 3831 59-2736501
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
1160 B South Rogers Circle
Boca Raton, FL 33487
(561) 997-1133
(Address and Telephone Number of Principal Executive Offices)
----------
Dominick M. Seminara, Chairman
PSI Industries, Inc.
1160 B South Rogers Circle
Boca Raton, Florida 33487
(561) 997-1133
(Name, Address and Telephone Number of Agent For Service)
----------
Copies of all communications to:
James M. Schneider, Esq.
Joel D. Mayersohn, Esq. Robert L. Sonfield, Esq.
Atlas, Pearlman, Trop & Borkson, P.A. Sonfield & Sonfield
200 East Las Olas Boulevard, Suite 1900 770 South Post Oak Lane
Fort Lauderdale, FL 33301 Houston, TX 77056
Telephone: (954) 763-1200 Telephone: (713) 877-8333
Facsimile No. (954) 766-7800 Facsimile No. (713) 877-1547
Approximate Date of Proposed Sale to the Public:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
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<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of one share
of Series C Convertible Preferred
Stock, par value $.0001 per share
("Preferred Stock"), and one
Series II Warrant to purchase one
share of Common Stock
("Series II Warrant") 920,000 $6.00(1) $5,520,000 $1,535
- ----------------------------------------------------------------------------------------------------------------------------
Preferred Stock included in
the Units 920,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Series II Warrants included
in the Units 920,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock issuable as payment
for dividends on the Preferred Stock 157,464 $1.3438(1) $211,601 $59
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
conversion of the Preferred
Stock included in the Units 4,232,000(2) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of the Series II
Warrants included in the
Units 920,000(2) $1.5453(1)(3) $1,421,676 $396
- ----------------------------------------------------------------------------------------------------------------------------
Underwriter's Unit Purchase
Option 80,000 $9.90(1) $792,000 $221
- ----------------------------------------------------------------------------------------------------------------------------
Preferred Stock included in
Unit Purchase Option 80,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Series II Warrants included
in Unit Purchase Option 80,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock issuable as payment
for dividends on the Preferred Stock 13,693 $1.3438(1) $18,401 $6
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
conversion of the Preferred Stock
included in the Unit Purchase
Option 368,000(2) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of the Series II
Warrants included in the Unit
Purchase Option 80,000(2) $1.5453(1)(3) $123,624 $35
- ----------------------------------------------------------------------------------------------------------------------------
Total Registration Fee $2,252
============================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 based upon the average of the closing bid and
asked price for shares of Common Stock on February 25, 1999.
(2) Pursuant to Rule 416, there are also being registered such additional
shares of Common Stock as may be issuable pursuant to the anti-dilution
provisions of the Preferred Stock and the Series II Warrants.
(3) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) based upon 115% of the average of the closing
bid and asked price for shares of Common Stock on February 25, 1999.
ii
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY OUR EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
iii
<PAGE>
Subject to Completion, dated March 9, 1999
PROSPECTUS
PSI INDUSTRIES, INC.
800,000 UNITS AT $6.00 PER UNIT
PSI Industries, Inc. is offering 800,000 units at a price of $6.00 per
unit. Each unit consists of one share of our Series C Convertible Preferred
Stock, par value $.0001 per share and one redeemable Series II Common Stock
Purchase Warrant. The Series C Convertible Preferred Stock and Series II Common
Stock Purchase Warrants will be detachable and may trade separately 30 days
following the date of this Prospectus or on such earlier date as may be
determined by the Underwriter in its sole discretion.
<TABLE>
<S> <C> <C> <C>
PER SHARE TOTAL
--------- ---------- Our Common Stock is quoted on the
Public Offering Price ........... $ 6.00 $4,800,000 OTC Bulletin Board under the symbol
Underwriting "PSII". On __________, 1999, the
discounts ..................... $ .60 $ 480,000 closing bid price per share of the
Proceeds to Common Stock as reported by the
PSI Industries, Inc............ $ 5.40 $4,320,000 OTC Bulletin Board was $_____.
</TABLE>
Proposed Trading Symbols on the OTC Bulletin Board:
Units - PSIIU
Series C Preferred Stock - PSIIP
Series II Warrants - PSIIW
----------
YOUR INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
UNITS ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
We have granted the Underwriter the right to purchase up to 120,000
Units to cover any over-allotments.
FAS WEALTH MANAGEMENT SERVICES, INC.
The date of this Prospectus is ____________, 1999
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and files reports and other
information with the Securities and Exchange Commission (the "Commission"). The
reports and other information filed by the Company can be inspected and copied
without charge at the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following regional offices of the
Commission: Seven World Trade Center, 13th Floor, New York, New York 10048, and
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference Section
of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Registration statements and other
documents and reports that are filed electronically through the Electronic Data
Gathering, Analysis and Retrieval System (including the Registration Statement)
are publicly available through the Commission's web site on the Internet
(http://www.sec.gov).
This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, each such
statement being qualified in its entirety by such reference. The Company will
provide without charge to each person who receives this Prospectus, upon written
or oral request of such person, a copy of any of the information that is
incorporated by reference herein (excluding exhibits to the information that is
incorporated by reference unless the exhibits are themselves specifically
incorporated by reference) by contacting the Company at PSI Industries, Inc.,
1160 B South Rogers Circle, Boca Raton, Florida 33487, Attention: Chief
Financial Officer, telephone (561) 997-1133.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information contained under the caption "Risk Factors,"
and financial statements, including the notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated herein, the information in this
Prospectus does not give effect to (i) shares of Common Stock issuable upon
conversion of the Series C Convertible Preferred Stock (the "Series C Preferred
Stock") offered hereby, (ii) shares of Common Stock issuable upon exercise of
the Series II Common Stock Purchase Warrants (the "Series II Warrants") offered
hereby, (iii) the exercise of the Underwriter's over-allotment option (the
"Over-Allotment Option"), (iv) shares of Common Stock issuable upon conversion
of 80,000 shares of Series C Preferred Stock and 80,000 Series II Warrants
pursuant to an option to purchase 80,000 Units by the Underwriter (the "Unit
Purchase Option"), and (v) options to purchase up to 47,050 shares of Common
Stock issued to employees and directors exercisable at prices ranging from $.10
per share to $1.50 per share. This Prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from the results discussed in the forward-looking statements. Each
prospective investor is urged to read this Prospectus in its entirety.
THE COMPANY
PSI Industries, Inc., through our Camera Division and Ancillary Imaging
Division, is engaged in the wholesale distribution and manufacture of cameras,
photographic film, certain internationally branded cameras and ancillary
photographic equipment nationwide to wholesale and retail businesses. Our Camera
Division products consist of five segments of the single-use disposable and 35mm
camera industry:
/bullet/ the Message Camera/trademark/;
/bullet/ the Smiletime/trademark/ Camera;
/bullet/ private label cameras;
/bullet/ Logo and Message-type cameras; and
/bullet/ internationally branded cameras.
Our Ancillary Imaging Division distributes branded cameras,
photographic film, ancillary photographic equipment and other proprietary
photographic products. In addition, our wholly-owned subsidiary, Sharp Film
Corporation, manufactures the film which is loaded into the Message
Cameras/trademark/ and the Smiletime/trademark/ and Logo Cameras. We sell our
ancillary imaging products primarily through our in-house telemarketing sales
organization and mass catalog mailings.
We market and distribute our products to a market comprised of
photographic retailers, independent gift boutiques, sundry shops, convenience
stores, pharmacies, mass marketers, and other similar retailers and wholesalers.
Our product lines represent distinct market segments for these customers, and
often represent a potential one stop source of the products that we distribute.
In November 1997, we entered into a non-exclusive worldwide license
agreement with Polaroid Corporation to manufacture and sell single-use cameras
containing pre-exposed film. The single-use camera market continues to be one of
the fastest growing segments within the film-imaging sector. In 1996, 1997 and
through September 30, 1998, we sold approximately 500,000, 1,500,000 and
2,300,000 units, including single-use cameras, respectively.
We feel that one of the key ingredients to profitability of our
Ancillary Imaging Division business is to purchase from those sources which
provide the best prices and availability. In addition, we distribute Eastman
Kodak Company, Agfa Corporation, Polaroid Corporation and Imation Corp.
products. We
3
<PAGE>
currently purchase film from two major film manufacturers for use in our
single-use cameras and have our cameras manufactured by three separate companies
located in the Peoples Republic of China and Hong Kong.
We were incorporated in Florida on October 20, 1986, under the name
Photoline Supplies, Inc., and on November 24, 1993, changed our name to PSI
Industries, Inc. The address and telephone number of our executive offices are
1160 B South Rogers Circle, Boca Raton, Florida 33487; (561) 997-1133.
SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN TRANSACTIONS"
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING US
AND OUR BUSINESS.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Units Offered by the Company (1)............................... 800,000 Units, each Unit consists of one
share of Series C Preferred Stock and one
Series II Warrant. The Underwriter has an
option to purchase up to 120,000 additional
Units to cover over-allotments. See
"Underwriting".
Terms of Conversion of Series C
Preferred Stock(1)............................................. Each share of Series C Preferred Stock will
be automatically converted on ________,
2001 (the second anniversary of the date of
this Prospectus) into ____ shares of
Common Stock. See "Description of
Securities".
Series C Preferred Stock Dividend.............................. 2% per annum ($.115 per share) until
converted, payable in cash or Common
Stock at our option.
Use of Net Proceeds............................................ Advertising and marketing, inventory expansion,
product development, reduction in trade payables
and working capital.
Common Stock Outstanding:
Prior to the Offering .................................... 10,627,243
After the Offering ...................................... 10,627,243
Series C Preferred Stock Outstanding:
Prior to the Offering .................................... 0
After the Offering (2) ................................... 800,000
Series II Warrants Outstanding:
Prior to the Offering .................................... 0
After the Offering ....................................... 800,000
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
OTC BULLETIN BOARD SYMBOLS:
Common Stock................................................... PSII
Units (Proposed)............................................... PSIIU
Series C Preferred Stock (Proposed)............................ PSIIP
Series II Warrants (Proposed).................................. PSIIW
Risk Factors .................................................. The Offering involves a high degree of risk
and immediate substantial dilution. See
"Risk Factors".
</TABLE>
- ----------
(1) We are offering 800,000 units at a price of $6.00 per unit. Each unit
(the "Unit") consists of one share of Series C Preferred Stock and one
Series II Warrant. Each share of Series C Preferred Stock will
automatically convert, without any action on our part or on the part of
the holder into ______ shares of Common Stock on _____________, 2001
(the second anniversary of the date of this Prospectus). This
conversion price is equal to (i) 80% of the average bid price of the
Common Stock for the 20 trading days prior to the date of this
Prospectus (the "Effective Date"), which resulting number shall in no
event be less than $1.25, divided into (ii) the offering price of $5.75
per share of Series C Preferred Stock. Each Series II Warrant entitles
the holder to purchase one share of Common Stock at an exercise price
of 115% of the average bid price of the Common Stock for the 20 trading
days prior to the Effective Date, during the four year period
commencing one year from the Effective Date. The Series II Warrants are
redeemable upon certain conditions. Should the Series II Warrants be
exercised, of which there is no assurance, the Company will receive the
proceeds therefrom aggregating up to an additional $__________. See
"Description of Securities".
(2) These shares of Series C Preferred Stock are convertible into _______
shares of Common Stock.
5
<PAGE>
SELECTED FINANCIAL DATA
The table below contains a summary of our historical financial
information derived from the Financial Statements included elsewhere in this
Prospectus. The nine months data at September 30, 1998 and 1997 are derived from
our unaudited financial statements and include all adjustments, and consist only
of normal recurring adjustments, that our management considers necessary to
fairly present such data. The results of the nine months ending September 30,
1998 are not necessarily indicative of the results to be expected for the full
year ended December 31, 1998. This information should be read in conjunction
with the Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Plan of Operations".
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ 14,055,252 $ 23,976,069 $ 17,025,282 $ 21,029,453
Cost of Sales 10,628,676 19,179,005 12,620,580 15,857,508
------------ ------------ ------------ ------------
Gross profit 3,426,576 4,797,064 4,404,702 5,171,945
Selling, general and administrative
expenses 2,517,044 4,251,152 3,176,898 3,432,734
Product development costs 416,177 408,486 122,152 71,240
------------ ------------ ------------ ------------
Income from operations 493,355 137,426 1,105,652 1,667,971
Other income (expense):
Interest expense, net (293,217) (582,809) (407,372) (488,690)
------------ ------------ ------------ ------------
Income (loss) before provision for
taxes on income 200,138 (445,383) 698,280 1,179,281
Taxes (benefit) on income 78,054(1) (15,874) 251,381 309,000
------------ ------------ ------------ ------------
Net income (loss) 122,084 (429,509) 446,899 870,281
Cumulative preferred stock dividend -- 18,965 -- 54,750
------------ ------------ ------------ ------------
Net income (loss) to common
stockholders $ 122,084 $ (448,474) $ 446,899 $ 815,531
NET INCOME PER SHARE
Basic $ 0.02 $ (0.06) $ 0.06 $ 0.09
------------ ------------ ------------ ------------
Diluted $ 0.02 $ (0.06) $ 0.05 $ 0.09
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,326,853 7,392,619 7,208,657 8,601,362
Diluted 7,785,781 7,392,619 8,298,689 9,063,586
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------
DECEMBER 31, 1997 ACTUAL ADJUSTED (2)
----------------- ------------- ------------------
BALANCE SHEET DATA: (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents $ 224,680 $ 96,388 $ 933,388
Working capital 1,423,935 4,624,101 6,611,101
Total assets 13,137,067 17,497,616 18,609,616
Long-term debt 517,196 577,993 577,993
Total liabilities 9,895,456 11,757,939 10,882,939
Stockholders' equity 3,241,611 5,739,677 7,726,677
</TABLE>
- ----------
(1) Prior to March 31, 1996, the Company was an S corporation and therefore
was not subject to Federal or State corporate income taxes (other than
Florida franchise taxes). The S corporation status was terminated as of
that date. Pro forma taxes on income reflect a tax
6
<PAGE>
provision as if the Company had not been an S corporation during the
first three months of 1996 and the provision for the year ended
December 31, 1996 represents a combined Federal and State tax rate of
approximately 39%. Historical earnings per share is not presented
because earnings per share of an S corporation may not be meaningful.
(2) Gives effect to the sale of 800,000 Units by us and the net proceeds
therefrom and the uses thereof.
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE
AND INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING
FACTORS IN EVALUATING US AND OUR BUSINESS BEFORE YOU PURCHASE THE OFFERED
SECURITIES. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
COMPETITION: TECHNOLOGICAL OBSOLESCENCE
The consumer photographic products market is highly competitive and
features many of the world's largest companies. Many of these companies have
substantially greater financial, technical, personnel and other resources than
us and have established reputations for success in the development, licensing
and sale of their products and technology. Certain of these competitors have the
financial resources necessary to enable them to withstand substantial price
competition or downturns in their respective markets. In addition, certain
companies may be expected to develop technologies or products, which may be
functionally similar to some or all of those being developed or currently
marketed by us. Industry standards with respect to the markets for the
technology and products being developed and marketed by us may be characterized
as evolving, which often results in product obsolescence or short product life
cycles. Accordingly, our ability to compete will depend on our ability to:
/bullet/ penetrate the marketplace in a timely manner for our proposed
and current products and technology;
/bullet/ continually enhance and improve such products and technology;
/bullet/ adapt our products to be compatible with specific products
manufactured by others;
and
/bullet/ successfully develop and market new products and technology.
We can give no assurance that we will be able to compete successfully,
that our competitors or future competitors will not develop technologies or
products that render our products obsolete or less marketable or that we will be
able to successfully enhance our products or adapt them satisfactorily.
INTERNATIONAL SALES: RELIANCE ON LIMITED NUMBER OF FOREIGN DISTRIBUTORS
We currently sell our products internationally through several foreign
distributors who resell the Message Camera/trademark/ product line to other
distributors or customers. We are highly dependent upon acceptance of the
products by such distributors and their active marketing and distribution
efforts.
7
<PAGE>
Although we work closely with our foreign distributors, we cannot directly
control such distributor sales and marketing activities and, accordingly, cannot
manage our product sales in foreign markets. Most of the distributors to whom we
sell the products, including those that are contractually obligated to purchase
our products in order to maintain their exclusive, distribution territories,
could discontinue carrying our products at any time.
DEPENDENCE ON SUPPLIERS
There can be no assurance that our current or future suppliers will be
able to meet our requirements on commercially reasonable terms or within
scheduled delivery times. Any interruption of our arrangements with suppliers
could cause a delay in the acquisition of materials for our products, and
consequently affect the timely delivery of our products to our customer base.
LITIGATION
We are involved in litigation. While we are unable to predict the
outcome of such litigation, management does not believe a negative outcome will
have a material adverse effect, although there can be no assurances. See "LEGAL
PROCEEDINGS".
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A substantial portion of our marketing efforts for our line of Message
Cameras/trademark/ will be focused on international sales. We have also engaged
several independent distributors in other sections of the world to market the
products and may enter into joint ventures or other relationships with other
foreign partners. The expansion of our international operations are subject to a
number of risks, including unexpected changes in regulatory requirements, import
and export restrictions and tariffs, the burden of complying with the variety of
foreign laws, potentially adverse tax consequences, currency fluctuations and
political and economical instability. Additionally, the protection of our
intellectual property may be more difficult to enforce outside of the United
States. In the event that we are successful in expanding our international
operations, the occurrence of any one or more of the aforementioned events or
other uncertainties of conducting international transactions could materially
affect our business, operating results and financial condition.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS
Our operating results may fluctuate significantly from period to period
as a result of a variety of factors, including product returns, purchasing
patterns of consumers, the length of our sales cycle to key customers,
distributors or other strategic partners, the timing of the introduction of new
products and product enhancements by us and our competitors, technological
factors, variations and sales by product distribution channels and competitive
pricing. Consequently, our product revenues may vary significantly by quarter
and our operating results may experience significant fluctuations.
ABSENCE OF DIVIDENDS ON COMMON STOCK
We have no present intention of paying cash dividends on our Common
Stock in the foreseeable future, as we intend to follow a policy of retaining
our earnings, if any, for use in our business. Except for periods prior to March
1996 when we were a subchapter S corporation, we have
8
<PAGE>
never paid cash dividends on our Common Stock. See "Description of Securities"
and "Price Range of Common Stock and Dividend Policy".
LACK OF PRIOR PUBLIC MARKET FOR THE UNITS, SERIES C PREFERRED STOCK AND
SERIES II WARRANTS BEING OFFERED
No prior public market has existed for the Units, Series C Preferred
Stock and Series II Warrants offered hereby and no assurance can be given that
one will develop subsequent to this Offering. Our Common Stock is currently
listed for trading on the OTC Bulletin Board under the symbol PSII. We have
applied for inclusion of the Units, Series C Preferred Stock and Series II
Warrants on the OTC Bulletin Board, although there can be no assurance that an
active trading market will develop, even if the securities are accepted for
quotation. Furthermore, as compared with other markets, an investor may find it
more difficult to dispose of or obtain accurate quotations for the price of the
securities on the OTC Bulletin Board. Additionally, if our securities are
accepted for quotation and active trading develops, we are required to timely
file our periodic reports with the Commission as required by the National
Association of Securities Dealers, of which there can be no assurance that we
will be able to continue to fulfill such requirement. Failure to timely file our
periodic reports will result in suspension from trading on the OTC Bulletin
Board until such time as we are current in our periodic filings. Our Common
Stock is currently listed on the OTC Bulletin Board under the symbol "PSII".
Upon completion of this offering, we intend to apply for listing of all our
securities, including the securities offered hereby, for inclusion on the Nasdaq
SmallCap Stock Market or the American Stock Exchange. There can be no assurance
that we will meet the initial listing criteria established by such entities, and
if approved, maintain such listing. The Underwriter may make a market in our
securities upon the closing of this Offering, but there is no assurance that it
will be successful in its efforts. The loss or failure of market makers for our
securities will have a material adverse effect on the market for our securities.
See "Description of Securities".
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT
After giving effect to this Offering, our officers, directors and
principal stockholders will beneficially own approximately ____% of our Common
Stock and will have the right to acquire up to an additional ___% of the Common
Stock pursuant to outstanding options and warrants. See "Principal
Stockholders". After giving effect to the conversion of the Series C Preferred
Stock, our officers, directors and principal stockholders will beneficially own
approximately ___% of our Common Stock. Accordingly, such persons may be able to
approve major corporate transactions including those involving amendments to our
Articles of Incorporation or the sale of substantially all our assets and may be
able to elect all our directors and to control our affairs. This voting control
may have the effect of delaying or preventing a change in control of PSI
Industries, Inc. and may adversely affect the rights of the holders of the
shares of our Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this offering will experience immediate and substantial
dilution of $_______ per share. As of September 30, 1998, we had a net tangible
book value of $5,731,969 or $.64 per share, derived from our September 30, 1998
balance sheet. After giving effect to the sale of the Units offered hereby at an
assumed price of $6.00 per Unit (of which $5.75 is allocable to the share of
Series C Preferred Stock included in the Unit), after deducting underwriting
discounts and estimated offering expenses, net tangible book value would have
been $_______ or $______ per share (based upon each share of Series C Preferred
Stock being convertible into shares of Common Stock). The result will be an
immediate increase in net tangible book value per share of $______ to existing
stockholders and an immediate dilution to new investors of $______ per share.
9
<PAGE>
BROAD DISCRETION IN APPLICATION OF PROCEEDS
Our management has broad discretion to adjust the application and
allocation of the net proceeds of this Offering, including funds received upon
exercise of the Series II Warrants. As a result of the foregoing, our success
will be substantially dependent upon the discretion and judgment of our
management with respect to the application and allocation of the net proceeds
hereof. Pending the application of the net proceeds, the funds will be invested
by management in temporary, short-term interest-bearing obligations. See "Use of
Proceeds," "Business" and "Management".
REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION
WITH THE EXERCISE OF THE SERIES II WARRANTS WHICH MAY NOT BE EXERCISABLE AND MAY
THEREFORE BE VALUELESS
We will be able to issue the securities offered hereby and shares of
our Common Stock upon the exercise of the Series II Warrants only if (i) there
is a current prospectus relating to the securities offered hereby under an
effective registration statement filed with the Commission and (ii) such Common
Stock is, to the extent required, then qualified for sale or exempt therefrom
under applicable state securities laws of the jurisdictions in which the various
holders of Series II Warrants reside. There can be no assurance, however, that
we will be successful in maintaining a current registration statement. After a
registration statement becomes effective, it may require updating by the filing
of a post-effective amendment. A post-effective amendment is required under the
Securities Act of 1933, as amended:
/bullet/ anytime after nine months subsequent to the effective date
thereof when any information contained in the prospectus is
over 16 months old;
/bullet/ when facts or events have occurred which represent a
fundamental change in the information contained in the
registration statement; or
/bullet/ when any material change occurs in the information relating to
the plan or distribution of the securities registered by such
registration statement.
The Prospectus forming a part of this Registration Statement will
remain current within the meaning of the Securities Act for not more than nine
months following the date of this Prospectus, or until ________, 2000, assuming
a post-effective amendment is not filed by us. We intend to qualify the sale of
the Units in a limited number of states, although certain exemptions under
certain state securities ("Blue Sky") laws may permit the Series II Warrants to
be transferred to purchasers in states other than those in which the Series II
Warrants were initially qualified. We will be prevented, however, from issuing
Common Stock upon exercise of the Series II Warrants in those states where
exemptions are unavailable and we have failed to qualify the Common Stock
issuable upon exercise of the Series II Warrants. We may decide not to seek, or
may not be able to obtain qualification of the issuance of such Common Stock in
all of the states in which the ultimate purchasers of the Series II Warrants
reside. In such a case, the Series II Warrants of those purchasers will expire
and have no value if such warrants cannot be exercised or sold. Accordingly, the
market for the Series II Warrants may be limited because of the Company's
obligation to fulfill both of the foregoing requirements. See "Description of
Securities".
10
<PAGE>
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY
OF SECURITIES
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
(as defined) less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. Such exceptions include an equity
security registered or approved for registration and traded on a national
securities exchange or quoted in the National Association of Securities Dealers'
Automated Quotation System and an equity security issued by an issuer that has:
/bullet/ net tangible assets of at least $2,000,000 if such an issuer
has been in continuous operation for three years;
/bullet/ net tangible assets of at least $5,000,000, if such issuer has
been in continuous operation for less than three years; or
/bullet/ average revenue of at least $6,000,000 for the preceding three
years.
In the event of authorization of the Units, Series C Preferred Stock and Series
II Warrants for quotation on the OTC Bulletin Board, such securities will
initially meet these criteria. However, if such securities should not fall
within any of the stated exceptions, the Units, Series C Preferred Stock and
Series II Warrants will become subject to Rules 15g-2 through 15g-9 under the
Securities and Exchange Act of 1934. These rules impose additional reporting,
disclosure and sales practice requirements on brokers and dealers and require
them to make a special suitability determination of each purchaser and receive
the purchaser's written consent to the transaction prior to the sale. In
addition, for any transaction involving a penny stock, unless exempt, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Securities and Commission relating to the penny stock market.
The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities and may affect the
ability of purchasers in this Offering to sell our securities in the secondary
market.
In the event that we were not able to qualify our securities for
listing on the OTC Bulletin Board, we will attempt to have our securities traded
in the "pink sheets". In such event, holders of our securities may encounter
substantially greater difficulty in disposing of their securities and/or in
obtaining accurate quotations as to the prices of our securities.
EXERCISE OF SERIES II WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Series II Warrants will provide, during their term, an opportunity
for the holder to exercise the Series II Warrants and profit from a rise in the
market price of the Common Stock, of which there is no assurance, with resulting
dilution in the ownership interest in us held by the then present stockholders.
Holders of the Series II Warrants most likely would exercise the Series II
Warrants and purchase the underlying Common Stock at a time when we may be able
to obtain capital
11
<PAGE>
on terms more favorable than those provided by such Series II Warrants, in which
event the terms on which we may be able to obtain additional capital would be
affected adversely. See "Underwriting".
UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES
A significant number of securities may be sold, in the ordinary course
of business, to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such securities through or
with the Underwriter. Although it has no legal obligation to do so, the
Underwriter from time to time in the future may make a market in and otherwise
effect transactions in our securities. To the extent the Underwriter acts as
market maker in the securities, it may be a dominating influence in that market.
The price and liquidity of such securities may be affected by the degree, if
any, of the Underwriter's participation in the market, inasmuch as a significant
amount of such securities may be sold to customers of the Underwriter. Such
customers subsequently may engage in transactions for the sale or purchase of
such securities through or with the Underwriter. Such market making activities,
if commenced, may be discontinued at any time or from time to time by the
Underwriter without obligation or prior notice. If a dominating influence at
such time, the Underwriter's discontinuance may adversely affect the price and
liquidity of the securities.
WARRANTS SUBJECT TO REDEMPTION
The Series II Warrants shall be exercisable for one share of Common
Stock at an exercise price of 115% of the average bid price of the Common Stock
for the 20 trading days prior to the Effective Date for a four year period
commencing one year from the Effective Date. The Series II Warrants are
redeemable by us for $.05 per Series II Warrant, at any time after one year from
the Effective Date, upon 30 days' prior notice, if the closing bid price of the
Common Stock, as reported by the OTC Bulletin Board exceeds 170% of the closing
bid price of the Common Stock ($_______ per share) on the Effective Date, for
any 20 consecutive trading days ending within ten days of the notice of
redemption. In the event that the Series II Warrants are called for redemption,
the Series II Warrant holders may not be able to exercise their Series II
Warrants if we have not updated this Prospectus in accordance with the
requirements of the Securities Act or these securities have not been qualified
for sale under the laws of the state where the Series II Warrant holder resides.
See "Requirements of Current Prospectus and State Blue Sky Registration in
Connection with the Exercise of the Series II Warrants Which May Not Be
Exercisable and May Therefore Be Valueless". Upon 30 days' written notice to all
holders of the Series II Warrants, we shall have the right to reduce the
exercise price and/or extend the term of the Series II Warrants in compliance
with the requirements of Rule 13e-4 to the extent applicable. See "Certain
Transactions," "Description of Securities" and "Underwriting".
ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT
THE MARKET
There are currently 10,627,243 shares of Common Stock issued and
outstanding and upon completion of the proposed offering, there will be a total
of 800,000 shares of Series C Preferred Stock outstanding. The following
securities have been reserved for issuance: _________ shares of Common Stock
issuable, commencing two years from the Effective Date, upon conversion of the
Series C Preferred Stock; 800,000 shares of Common Stock issuable upon exercise
of the Series II Warrants offered to investors in this Offering; 120,000 Units
issuable pursuant to the Underwriter's Over-Allotment Option; 120,000 shares of
Series C Preferred Stock included in the Underwriter's Over-Allotment Option
which are convertible into _________ shares of Common Stock; 120,000
12
<PAGE>
shares of Common Stock issuable upon exercise of the Series II Warrants included
in the Underwriter's Over Allotment Option; 80,000 Units issuable upon exercise
of the Underwriter's Unit Purchase Option; 80,000 shares of Series C Preferred
Stock included in the Underwriter's Unit Purchase Option which are convertible
into ____ shares of Common Stock; 80,000 shares of Common Stock which are
issuable upon exercise of the Series II Warrants included in the Underwriter's
Unit Purchase Option; 249,827 shares of Common Stock issuable upon the
exercise of certain other outstanding options and warrants. The foregoing does
not give effect to Common Stock issuable for the payment of Series C Preferred
Stock dividends. After the exercise of all such warrants and options we will
have 11,877,070 shares of Common Stock outstanding and 48,122,930 shares of
authorized but unissued Common Stock available for issuance without further
stockholder approval. As a result, any issuance of additional shares of Common
Stock may cause our current stockholders to suffer significant dilution which
may adversely affect the market. See "Description of Securities" and
"Underwriting".
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
The sale, or availability for sale, of a substantial number of shares
of Common Stock in the public market subsequent to the offering pursuant to Rule
144 under the Securities Act or otherwise could materially or adversely affect
the market price of the securities and could impair our ability to raise
additional capital from the sale of our equity securities or debt financing.
There are currently _________ shares of our outstanding Common Stock that are
"restricted securities" which, in the future, may be sold upon compliance with
Rule 144 adopted under the Securities Act. Rule 144, as amended, provides, in
essence, that a person holding "restricted securities", which trade on the OTC
Bulletin Board for a period of one year may sell every three months a number of
shares equal to one percent of our issued and outstanding shares. The amount of
"restricted securities" which a person who is not affiliated with us may sell is
not so limited, since non-affiliates may sell without volume limitation their
shares held for two years. Nonaffiliated persons who hold for the two year
period described above may sell unlimited shares once their holding period is
met. All of our executive officers and directors have agreed not to sell their
shares of Common Stock for a period of 12 months from the consummation of the
Offering, except for 750,000 shares of Common Stock subject to a three-year
lock-up, without the Representative's prior written consent. Should we fail to
achieve at least 80% of our pre-tax net income projections for any of the next
three fiscal years the 750,000 shares will be cancelled. The pre-tax net income
projections for 1999, 2000 and 2001 are $3,005,349, $5,442,021 and $7,835,339,
respectively.
Prospective investors should be aware that the possibility of sales
may, in the future, have a depressive effect on the price of the Series C
Preferred Stock, Common Stock or Series II Warrants in any market which exists
or may develop and, therefore, the ability of any investor to market his shares
may be dependent directly upon the number of shares that are offered and sold.
Our affiliates may sell their shares during a favorable movement in the market
price of our securities which may have a depressive effect on its price per
share. See "Description of Securities".
UNDERWRITER TO RECEIVE SUBSTANTIAL BENEFITS IN CONNECTION WITH THE OFFERING
The Underwriter will receive substantial benefits from us in connection
with this Offering. These benefits include underwriting discounts/commissions, a
non-accountable expense allowance, an Underwriter's Unit Purchase Option,
warrant exercise fees and an advisory fee in connection with certain services to
be provided in the future. In addition, the Underwriter has been granted certain
rights under the Unit Purchase Option, which rights include the ability to
require us to include the
13
<PAGE>
Underwriter's securities in a registration statement under the Securities Act.
The exercise of these rights will result in our incurring substantial expenses
and may cause us to register an offering of our securities at a time which is
detrimental to our plans. See "Underwriting".
DEPENDENCE ON KEY PERSONNEL
Our success will be largely dependent on the efforts of Dominick
Seminara, our Chief Executive Officer, Benjamin Cohen, our President and Chief
Operating Officer, and Mirco Vietti, our Executive Vice President. Although the
Company has written employment agreements with various members of our
management, there can be no assurance that such persons will continue their
employment with us. The loss of the services of one or more of such key
personnel could have a material adverse effect on our operations and marketing
efforts. We have obtained $800,000 of key man insurance on the life of Mr.
Seminara, which may prove insufficient in the event Mr. Seminara were to become
deceased.
EXPERIENCE OF THE UNDERWRITER
This offering is the Underwriter's first underwritten public offering
of securities as lead managing underwriter. Although the Underwriter's principal
employees have had extensive experience in various aspects of the securities
business, they have extremely limited experience in the public underwriting of
securities. In addition, the Underwriter is a relatively small firm, and there
can be no assurance that the Underwriter will be able to continue to make a
market in the Units, Series C Preferred Stock or Warrants, or that if it does,
it will be able to adequately support trading of the Common Stock in the
aftermarket. See "Underwriting".
YEAR 2000 RISK
We have implemented a Year 2000 date conversion program to ensure that
our computer systems and applications will function properly beyond 1999. We
believe that we have allocated adequate resources for this purpose and expect
our Year 2000 date conversion program to be successfully completed on a timely
basis. There can, however, be no assurance that this will be the case. We do not
expect to incur significant expenditures to address this issue. The ability of
third parties with whom we transact business to adequately address their
respective Year 2000 issues is outside of our control. There can be no assurance
that our failure or the failure of such third parties to adequately address our
respective Year 2000 issues will not have a material adverse effect on our
business, financial condition, cash flows and results of operations.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by PSI Industries, Inc. (the "Company")
from the sale of the Units offered hereby, after deducting underwriting
discounts and commissions and estimated expenses payable by the Company, will be
approximately $3,676,000 (or approximately $4,302,400 if the over-allotment
option granted to the Underwriters is exercised in full). The Company intends to
use the net proceeds of the Offering approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT
OF NET PROCEEDS PERCENT
------------------ -------
<S> <C> <C>
Advertising and Marketing.............. $1,500,000 40.8%
Inventory Expansion.................... 275,000 7.5%
Product Development.................... 189,000 5.1%
Reduction in Trade Payables............ 875,000 23.8%
Working Capital........................ 837,000 22.8%
---------- ------
TOTAL $3,676,000 100.00%
========== ======
</TABLE>
Although it is uncertain whether or not the price of the Company's
shares of Common Stock will rise to a level at which the Series II Warrants
would be exercised, if subscribers in this Offering elect to exercise all of the
Series II Warrants included in the Units, the Company will realize gross
proceeds of approximately $__________. Management anticipates that the proceeds
from the exercise of the Series II Warrants would be contributed to working
capital of the Company. Nevertheless, the Company may at the time of exercise
allocate a portion of the proceeds to any corporate purpose. Accordingly,
investors who exercise their Series II Warrants will entrust their funds to
management, whose specific intentions regarding the use of such funds are not
currently known.
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's Board of Directors, at its discretion. The Company
believes that the net proceeds of this Offering, together with funds generated
from operations, will be sufficient to conduct its operations for at least 12
months.
To the extent that the Company's expenditures are less than projected
or the proceeds of this Offering increase as a result of the exercise by the
Underwriters of the Over-Allotment Option, the resulting balances will be used
as working capital. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, although there can be no assurance that such
additional financing, if available, will be on terms acceptable to the Company.
The net proceeds of this Offering that are not expended immediately will be
deposited in interest bearing accounts, or invested in government obligations,
certificates of deposit or similar short-term, low risk investments.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of September 30, 1998, and (ii) as adjusted to reflect the sale of the Units
offered hereby. The table should be read in conjunction with the Financial
Statements, the notes thereto and the pro forma financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
Long-term notes payable, less
current maturities $ 577,993 $ 577,993
Stockholders' equity:
Common Stock, $.0001 par value -
20,000,000 shares authorized;
8,885,743 shares issued and
outstanding (actual), and shares
issued and outstanding (as adjusted) 891 891
Convertible Preferred Stock - Series A,
$.0001 par value, 200,000 shares
authorized, 48,667 shares issued and
outstanding, $1,460,010 liquidation
value 5 5
Convertible Preferred Stock - Series B,
$.001 par value, 20,000 shares authorized,
15,022 shares issued and outstanding,
$1,502,200 liquidation value 15 15
Convertible Preferred Stock - Series C,
$.0001 par value, 1,000,000 shares authorized,
-0- shares issued and outstanding (actual),
and 800,000 shares issued and outstanding
(as adjusted) -- 80
Additional paid-in capital 4,151,771 7,827,691
Deferred compensation (19,409) (19,409)
Stock subscription receivable (60,747) (60,747)
Retained earnings 1,667,151 1,667,151
----------- -----------
Total stockholders' equity 5,739,677 9,415,677
----------- -----------
Total capitalization $ 6,317,670 $ 9,993,670
=========== ===========
</TABLE>
16
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's shares of Common Stock are traded over-the-counter and
quoted on the OTC Electronic Bulletin Board under the symbol "PSII". The
reported high and low bid prices for the Common Stock are shown below for the
period from inception of trading in September 1996 through January 29, 1999. The
quotations reflect inter-dealer prices and do not include retail mark-ups,
mark-downs or commissions. The prices do not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
1996
Fourth Quarter (from September 16, 1996) $5.12 $4.00
1997
First Quarter $6.56 $4.50
Second Quarter $7.00 $5.25
Third Quarter $7.50 $6.00
Fourth Quarter $7.50 $5.25
1998
First Quarter $7.00 $4.25
Second Quarter $5.125 $3.875
Third Quarter $5.125 $2.75
Fourth Quarter $3.4375 $1.375
1999
First Quarter (through March 5, 1999) $2.00 $0.875
</TABLE>
The closing bid and asked prices of the Company's Common Stock on
March 5, 1999 were $1.625 and $1.75, respectively, as quoted on the OTC
Electronic Bulletin Board. As of March 5, 1999, there were 56 stockholders
of record of the Company's Common Stock, and approximately 425 beneficial
holders of the Common Stock.
Upon completion of this Offering, the Company intends to apply for
listing of all its securities, including the securities which are offered
hereby, for inclusion on the Nasdaq SmallCap Stock Market or the American Stock
Exchange. There can be no assurance that we will meet the initial listing
criteria established by such entities, and if approved, maintain such listing.
Except for periods prior to March of 1996 when the Company was a
Subchapter S corporation, the Company has never paid cash dividends on its
Common Stock. The Company presently intends to retain future earnings, if any,
to finance the expansion of its business and does not anticipate that any cash
dividends will be paid in the foreseeable future. The future dividend policy
will depend on the Company's earnings, capital requirements, expansion plans,
financial condition and other relevant factors.
The Series C Preferred Stock will be entitled, as and when declared by
the Board of Directors, to receive, in respect of the two years before the
Series C Preferred Stock is converted, an annual dividend per share payable
either in cash or shares of Common Stock, at the option of the Company, equal to
$0.115 or 2% of the $5.75 value of the Series C Preferred Stock included in the
Units.
Other than the foregoing, the Company does not anticipate the
declaration or payment of any dividends in the foreseeable future. There can be
no assurance that cash dividends of any kind will ever be paid.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
GENERAL
The Company was organized in 1986 to engage in the wholesale
distribution of branded cameras, photographic film, ancillary photographic
equipment and other proprietary photographic products. Since its formation, the
Company has evolved into a major national wholesale distribution company to over
20,000 specialty retailers, mass market merchandisers and wholesalers. Since
1987, the Company's revenues have increased on an annual basis from $1,000,000
to approximately $34,000,000 in 1994 and $19,000,000 in 1995. The Company has
been profitable throughout these years. The decline in revenues in 1995
reflected primarily a strategic decision by management to focus its distribution
efforts on higher margin products such as branded cameras and ancillary
photographic equipment.
Beginning in the latter part of 1995, the Company embarked on a program
of identifying, acquiring and developing a proprietary line of cameras. In 1996,
through the acquisition of exclusive distribution and manufacturing rights to
the Message Camera/trademark/, an innovative, single-use disposable camera which
allows for the application of full-color messages and graphics to pre-exposed
film, and the development of its Smiletime/trademark/ camera, a proprietary line
of high-quality 35mm single-use cameras, the Company added a Camera Division as
an independent profit center. The development of the Camera Division enabled the
Company not only to add products with significantly higher profit margins but
also allowed the Company to expand its marketing to other channels of
distribution. Due primarily to the market penetration of its Camera Division
which achieved sales of approximately $10,000,000 in 1997, the Company's
revenues for 1997 increased to approximately $24,000,000 compared with
approximately $14,000,000 in 1996.
RESULTS OF OPERATIONS
The following table sets for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's Statements of
Operations.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------------
1997 1996 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of Sales 79.99% 75.62% 75.41% 74.13%
------ ------ ------ ------
Gross Profit 20.01% 24.38% 24.59% 25.87%
Selling, General and Administrative
Expenses 17.73% 17.91% 16.32% 18.66%
Product Development Costs 1.70% 2.96% 0.34% 0.72%
------ ------ ------ ------
Operating Income 0.58% 3.51% 7.93% 6.49%
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Interest Expense, Net of Interest
Income 2.43% 2.09% 2.32% 2.39%
------ ------ ------ ------
Income (Loss) before Income
Taxes (1.85%) 1.42% 5.61% 4.10%
Income Tax Provision (Benefit) (0.07%) 0.36% 1.47% 1.48%
------ ------ ------ ------
Net Income (Loss) (1.78%) 1.06% 4.14% 2.62%
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
NET SALES
The Company's net sales for 1997 were $23,976,069 compared to
$14,055,252 in 1996, an increase of $9,920,817 or 70.6%. The increase in net
sales was primarily attributable to a full year of sales for the Message
Camera/trademark/ which was introduced in late 1996 and an increase in the
customer base.
GROSS PROFIT
Gross profit for 1997 was $4,797,064 compared to $3,426,576 in 1996, an
increase of $1,370,488 or 40%. As a percentage of sales, gross profit decreased
to 20% in 1997 from 24.4% in 1996. Several factors accounted for the decrease in
1997 in gross profit as a percentage of net sales over the prior year. These
included additional production start-up costs for the Message Camera/trademark/,
primarily the development of point of purchase displays, increased freight
charges, reflecting the Company's need to employ air freight to acquire adequate
camera inventory to meet the demand for the Message Camera/trademark/, increase
in cost of sales in the Company's Ancillary Imaging Division over the prior year
and a change in the product mix with increased sales in 1997 of film which
carries small profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1997 were $4,251,152
compared to $2,517,044 in 1996, an increase of $1,734,108 or 68.9%. As a
percentage of sales, these expenses decreased to 17.7% in 1997 from 17.9% in
1996. Of the dollar increase, $662,280 represented increased commissions and
royalties due to higher sales, $337,085 represented increased payroll costs in
connection with the hiring of additional personnel to support the growth in
sales, $194,801 primarily represented increased professional fees in connection
with litigation, financing and other corporate matters, $181,000 represented
increased amortization and depreciation expenses due primarily to the
amortization of the Message Camera/trademark/ product development costs and
$115,289 represented increased trade show costs. The remaining increase was
attributable to additional selling, general and administrative expenses.
PRODUCT DEVELOPMENT COSTS
Product development costs for 1997 were $408,486 compared to $416,177
for 1996, a decrease of $7,691 or 1.8%. As a percentage of sales, these costs
decreased to 1.7% in 1997 from 3% in 1996.
19
<PAGE>
INTEREST EXPENSE NET OF INTEREST INCOME
Interest expense net of interest income for 1997 was $582,809 compared
to $293,217 in 1996, an increase of $289,592 or 98.8%. As a percentage of sales,
these expenses increased to 2.4% in 1997 from 2.1% in 1996. The dollar increase
in interest expense was attributable to increased borrowings on the line of
credit required to finance the Company's growth.
PROVISION FOR INCOME TAXES
For 1997 the Company recorded a tax benefit of $15,874 due to a net
operating loss for the year.
NET INCOME (LOSS)
As a result of the foregoing, the Company posted a net loss of $429,509
in 1997 compared to net income of $149,463 in 1996, a decrease of $578,972.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
NET SALES
The Company's net sales for the nine months ended September 30, 1998
were $21,029,453 compared to $17,025,282 for the nine months ended September 30,
1997, an increase of $4,004,171 or 23.5%. The increase in net sales was
primarily attributable to an increase in the volume from existing customers,
securing new mass merchandise and independent gift retailers for the Company's
Camera Division products, and penetration of the international markets.
GROSS PROFIT
Gross profit for the nine months ended September 30, 1998 was
$5,171,945 compared to $4,404,702 for the nine months ended September 30, 1997,
an increase of $767,243 or 17.4%. As a percentage of sales, gross profit
decreased to 24.6% for the nine months ended September 30 1998 from 25.9% for
the nine months ended September 30, 1997. The decrease in gross profit as a
percentage of sales was due to a change in the product mix, principally a
substantial increase in sales of Kodak cameras which carry a small profit
margin, and an increase in freight charges arising out of the incurrence of
additional air freight expenses that were necessary to obtain adequate product
to meet the substantial growth in sales of the Company's Camera Division
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended
September 30, 1998 were $3,432,734 compared to $3,176,898, for the nine months
ended September 30, 1997 an increase of $255,836 or 8.1%. As a percentage of
sales, these expenses decreased to 16.3% for the nine months ended September 30,
1998 from 18.7% for the nine months ended September 30, 1997. Of the dollar
increase, $476,161 represented increased payroll costs in connection with the
hiring of additional personnel to support the growth in sales, offset by a
decrease of $188,603 in advertising, marketing and promotion expenses, and a
decrease of $215,180 in reduced royalties to Polaroid Corporation
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compared to royalties paid the previous licensor. The remaining dollar increase
was attributable to various selling, general and administrative expenses.
PRODUCT DEVELOPMENT COSTS
Product development costs for the nine months ended September 30, 1998
were $71,240 compared to $122,152 for the nine months ended September 30 1997, a
decrease of $50,912 or 41.7%. As a percentage of sales, these costs decreased to
.34% for the nine months ended September 30, 1998 from .72% for the nine months
ended September 30, 1997.
INTEREST EXPENSE NET OF INTEREST INCOME
Interest expense net of interest income for the nine months ended
September 30,1998 was $488,690 compared to $407,372 for the nine months ended
September 30, 1997, an increase of $81,318 or 20%. As a percentage of sales,
these expenses decreased to 2.3% for the nine months ended September 30, 1998
from 2.4% for the nine months ended September 30, 1997. The dollar increase in
interest expense was attributable to increased borrowings on the line of credit
required to finance the Company's growth.
PROVISION FOR INCOME TAXES
Provision for income taxes for the nine months ended September 30, 1998
was $309,000 compared to $251,381 for the nine months ended September 1997, an
increase of $57,619. The effective tax rate decreased to 25.8% for the nine
months ended September 30, 1998 from 36% for the nine months ended September 30,
1997 due to the Company's utilization of its net operating loss carry forward
from the prior year.
As a result of the foregoing, net income for the nine months ended
September 30, 1998 was $870,281 compared to net income of $446,899 for the nine
months ended September 30, 1997, an increase of $423,382. This represents an
increase in net income as a percentage of net sales to 4.1% for the nine months
ended September 30, 1998 from 2.6% for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements primarily through
operations, borrowings on its bank credit line and sales of its securities. The
Company also issued shares of Preferred Stock in order to finance an acquisition
of inventory during 1998.
The Company's bank credit facility currently permits borrowings of up
to $12,000,000 against a fixed percentage of eligible accounts receivable and
inventory. The interest rate on the line is at the financial institutions prime
rate or the LIBOR rate plus 225 basis points. The amount borrowed under the
credit facility varies based on the Company's cash requirements. The credit
facility is collateralized by substantially all of the assets of the Company. As
of September 30, 1998 the interest rate that was in effect was 8.25% and
$6,917,226 was outstanding and classified as a short term liability. The credit
facility terminates on September 15, 2001 and shall automatically renew itself
from year to year.
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As of September 30, 1998, the Company had working capital of
$4,624,101. Operating activities provided cash of $132,526 primarily due to
increases in accounts receivable and inventories of $214,485 and $2,896,996
respectively, which were partially offset by net income of $870,281. Net cash
used in investing activities was $108,187, reflecting the purchase of certain
fixed assets and investments in patents. Net cash used in financing activities
was $152,631, consisting primarily of payments to the Company's bank credit
facility.
Subsequent to September 30, 1998, the Company raised $875,000 through
sales to private investors of an aggregate number of 975,000 shares of its
Common Stock pursuant to a private offering under Rule 504 of Regulation D of
the Securities Act of 1933, as amended. The proceeds were used primarily for
working capital.
The Company is not currently generating sufficient working capital to
fund its projected expansion of operations. The Company believes that to create
a substantial increase in sales of the Message Camera/trademark/ product line,
it will be necessary to commence a national advertising campaign. In addition,
expansion of operations will require capital infusions to fund purchase of
inventory and to meet the Company's working capital needs. Accordingly, the
Company is actively exploring several possibilities of raising additional
capital through the issuance of its securities. There can be no assurances that
the Company will be successful in obtaining additional financing in connection
with this, or any other, financing possibility on terms acceptable to the
Company, or at all.
YEAR 2000
Until recently, many computer programs were written using two digits
rather than four digits to define the applicable year in the twentieth century.
Such software may recognize a date using "00" as the year 1900 rather than the
year 2000. Utilizing both internal and external resources, the Company is in the
process of defining, assessing and converting or replacing various programs,
hardware and instrumentation systems to make them Year 2000 compatible. The
Company's Year 2000 project is comprised of two components -- business
applications and equipment. The business applications component consists of the
Company's business computer systems, as well as the computer systems of
third-party suppliers or customers, whose Year 2000 problems could potentially
impact the Company. Equipment exposures consist of personal computers, system
servers and telephone equipment whose Year 2000 problems could also impact the
Company. Management believes that the cost of its Year 2000 initiatives is not
expected to be material to the Company's results of operations or financial
position.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Section and elsewhere in this
Registration Statement regarding matters that are not historical facts are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such forward-looking statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. All statements which
address operating performance, events or developments that management expects or
anticipates to incur in the future, including statements relating to sales and
earnings growth or statements expressing general optimism about future operating
results, are forward-looking statements. The forward-looking statements are
based on management's current views and assumptions regarding future events and
operating performance. Many factors could cause actual results to differ
materially from estimates contained in management's forward-looking statements.
The differences may be caused by a variety of factors, including but not limited
to adverse economic conditions, competitive pressures, inadequate capital,
unexpected costs, lower revenues, net income and forecasts, the possibility of
fluctuation and volatility of the Company's operating results and financial
condition, inability to carry out marketing and sales plans and loss of key
executives, among other things.
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BUSINESS
GENERAL
PSI Industries, Inc. (the "Company") is engaged in the wholesale
distribution and manufacture of cameras, photographic film, certain
internationally branded cameras and ancillary photographic equipment nationwide
to wholesale and retail businesses. Since its formation in 1986, the Company has
evolved into a major national wholesale distribution company to over 20,000
specialty retail and mass market merchandise outlets and wholesalers.
The Company estimates that the market for cameras, film, and ancillary
photographic equipment is in excess of $75 billion annually and is projected to
enjoy steady growth as reported in the 1997 PMA Consumer Photographic Survey.
The Company markets and distributes its products to a market comprised of
photographic retailers, independent gift boutiques, sundry shops, convenience
stores, pharmacies, mass marketers, and other similar retailers and wholesalers.
The Company's product lines represent distinct market segments for these
customers, and often represent a potential one-stop source for the Company's
customers of the products that the Company distributes.
The Company's camera products consist of five segments of the
single-use disposable and 35mm camera industry: (1) the Message
Camera/trademark/ which allows for the application of full-color messages and
graphics to pre-exposed film offering the consumer occasion-specific messages on
each print, utilizing the Company's own patent pending proprietary technical
process; (2) Smiletime/trademark/ camera, a proprietary line of high quality
35mm and single-use cameras competitively priced to meet the standards of
wholesalers and the camera retailer; (3) private label cameras, which contain
customized camera identities for private label retail customers; (4) Logo and
Message-type cameras serving corporate America for incentive and promotional and
premium events; and (5) international branded cameras, such as Kodak and Fuji.
The single-use camera photographic market continues to be one of the
fastest growing segments within the film-imaging sector. Since its introduction,
there has been dramatic growth in the sales of the cameras, from sales of less
than 1 million units in 1988 to in excess of 270 million units worldwide in 1997
with 84 million units sold in the United States. In 1996, 1997, and through
September 30, 1998, the Company has sold approximately 500,000, 1,500,000, and
2,300,000 units, including single-use cameras, respectively.
In January 1996 the Company became the worldwide licensee, distributor
and manufacturer of the Message Camera/trademark/ under a licensing agreement
with Keepsake, Inc. With the establishment of a nationwide sales force of
independent manufacturer's representatives, independent distributors and
appointment of international distributors, the Company began to create a demand
for the Message Camera/trademark/ as well as its other camera products. It
subsequently became evident that Polaroid Corporation of Cambridge,
Massachusetts, held a patent for photographic technology encompassing
pre-exposed film. Effective November 1, 1997, due to a dispute that arose over
the validity of Keepsake's patents, the Company discontinued the royalty
payments to Keepsake and entered into a license agreement with Polaroid
Corporation, precipitating the termination of the Keepsake agreement in February
1998. See "LEGAL PROCEEDINGS".
Under the terms of the agreement with Polaroid, the Company has a
non-exclusive license to manufacture and sell single-use cameras containing
pre-exposed film worldwide. To the best of the
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Company's knowledge, Concord Camera Corporation is the only other company that
has been issued a non-exclusive license from Polaroid for the use of the same
technology. See "Licenses, Patents and Trademarks".
PRODUCTS
ANCILLARY IMAGING DIVISION - the Company's Ancillary Imaging Division
is the distribution of branded cameras, photographic film, ancillary
photographic equipment and other proprietary photographic products. Among the
products sold are amateur film, cameras, batteries, travel supplies, albums,
photo accessories, mini-lab supplies and camera accessories. Among the brand
names sold by the Company are Kodak, Fuji, Konica, Keystone, Agfa, Polaroid,
Duracell, Sony, Canon, Olympus, Ricoh and Minolta, to name a few.
CAMERA DIVISION
The Camera division is divided into four profit centers:
/bullet/ MESSAGE CAMERA/trademark//RETAIL - the Message
Camera/trademark/ is a small, compact and contoured single-use
camera, which incorporates the Company's patent-pending
technological process, through which a color-latent image is
pre-exposed onto color negative film and placed into a
technologically proprietary single-use camera. The Message
Camera/trademark/ is preloaded and ready to use with high
quality 400 ISO high definition film and may contain 12, 15,
18 or 24 exposures.
The retail occasion-specific line of Message Camera/trademark/
includes the following: The "Happy Birthday" Message
Camera/trademark/, the "Wedding" Message Camera/trademark/,
the "Anniversary" Message Camera/trademark/, the "It's a Boy"
Message Camera/trademark/, the "It's a Girl" Message
Camera/trademark/, the "Party" Message Camera/trademark/, the
"Vacation" Message Camera/trademark/, the "Bible" Message
Camera/trademark/, the "Graduation" Message Camera/trademark/,
the "Pet Dog" Message Camera/trademark/, the "Pet Cat" Message
Camera/trademark/, the "Season's Greetings" Message
Camera/trademark/, "Baby's First Birthday" Message
Camera/trademark/, the "Halloween" Message Camera/trademark/,
the "Baby Shower Message Camera/trademark/", the "Bridal
Shower Message Camera/trademark/" and the "Hawaii Message
Camera/trademark/". Certain cameras consist of 18 exposures
and others contain 24 exposures. Each occasion-specific camera
has a different occasion-related message and/or colorful art
on each frame and/or photographic print. Printed on the top of
each camera is the list of messages pre-exposed and the frame
on which it will appear.
/bullet/ SMILETIME/trademark/ CAMERAS - the Company's
Smiletime/trademark/ cameras are a line of 35mm single-use
cameras that are currently comprised of five different
colorful models, available with or without flash. The product
line includes an underwater use model and a panoramic model
which produces broader and larger snapshots. The
Smiletime/trademark/ single-use cameras are pre-loaded with
400 ISO high definition 15 or 27 exposure color film. Certain
models are produced using newly constructed proprietary
cameras and other models are made using recycled camera
casings.
/bullet/ MESSAGE/LOGO PREMIUM INCENTIVE CAMERAS - Message/Logo Premium
Incentive Cameras are a unique promotional tool for event
marketing and product promotions that enables corporate
America to incorporate its name, logo, company slogan or
personalized message
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on the film itself or on the outer camera packaging. Each
standard premium camera may consist of 15 or 24 exposures. A
significant feature of the camera is the capability of
including an advertisement, rebate, coupon or free offer
photograph on a 16th or 25th exposure, which the user
unexpectedly receives with their developed film. Examples of
this promotional tool may include an autographed photograph, a
free gift coupon, a discount on the next purchase, an
announcement of an upcoming event, promotion or an informative
advertisement.
/bullet/ PRIVATE LABEL - Private Label cameras consist of single-use
cameras or 35mm cameras prepared and designed specifically for
the mass-market retailers requiring a competitively priced
high-quality product under their own corporate image.
The Camera Division currently has cameras manufactured on a
sub-contract basis in the People's Republic of China and Hong Kong using its
camera requirements. These manufacturers are some of the world's foremost
single-use and 35mm camera manufacturers. Currently most of the product line of
35mm cameras manufactured by the Company are newly constructed. There is,
however, an on-going supply of our recycled camera casings, which, from time to
time, the Company remanufactures and recycles for its own proprietary single-use
camera line. The advantage to the use of our recycled casings enables the
Company to competitively sell a single-use camera in the marketplace at
increased profits.
SHARP COLOR FILM - the Company has a wholly-owned subsidiary, Sharp
Film Corporation, and is currently using the name "Sharp Color Film/trademark/"
imprinted on each canister of film and loaded into The Message
Cameras/trademark/ and the Smiletime/trademark/ and Logo cameras. It is the
Company's intention to introduce a line of color negative film to the consumer
marketplace known as Sharp Film to its own niche market as sales of the Camera
Division grow and brand awareness is achieved.
SALES AND MARKETING
ANCILLARY IMAGING DIVISION - the Company distributes its ancillary
imaging products to independent specialty retailers and regional chains, which
include camera stores, film labs, gift shops, convenience stores, pharmacies and
one-hour photo retailers and wholesalers. The products are sold to an aggregate
of 20,000 individual customers. Sales of the ancillary imaging products are
primarily accomplished through the Company's in-house telemarketing sales
organization and mass catalog mailings. In its sales of ancillary imaging
products there are no order requirements for the retailer and orders are usually
processed the same day received.
MESSAGE CAMERA/trademark/ - the occasion-specific line of Message
Cameras/trademark/ is marketed domestically by a group of 23 independent
manufacturer's representative organizations with a combined sales force of
approximately 275 sales representatives. The sales organizations have been
assigned to specific market segments within their territory. The Company has
currently divided the segments into mass merchandise retailers and independent
gift retailers. The mass merchandise retailers include all drug, grocery and
convenience store chains, discount stores and wholesale clubs. The Company
focuses its marketing in this segment on the top 141 retailers and has selected
experienced sales representative organizations to market this product. Several
mass market merchandisers including Walgreens, Toys-R-Us, K-Mart, American
Stores, CVS and Party City already carry The Message Camera/trademark/ line. The
Message Camera/trademark/ is also marketed to a wide range of independent retail
stores such as gift and card stores, party stores, airport hotel and motel gift
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shops, flower shops, baby stores, religious book stores and military post
exchanges. According to the 1996 Gift and Decorative Accessories Trade
Publication, there are in excess of 170,000 independent retailers to whom the
product line may be sold.
The Company believes that the Message Camera/trademark/ concept has a
potential in the world marketplace. Accordingly, it intends to market the
products internationally through the identification of overseas distributors
throughout Europe, Mid-East and Asia, each of which would be granted exclusive
distribution rights within a specified territory under negotiated sales and
distribution agreements.
PREMIUM/INCENTIVE MESSAGE/LOGO CAMERAS - the Premium/Incentive
Message/Logo camera is currently marketed by a combination of independent sales
representative organizations that focus on promotional activities for corporate
clients and by the Company's own product premium sales department. Some of the
companies that have utilized the message camera incentive program for
promotional purposes are: Coca Cola, IBM, NationsBank, John Hancock Insurance,
Club Med and Sprint. The Company also targets the private label promotional
market by utilizing the approximately 10,000 ad specialty distributors who are
members of the Ad Specialty Institute Association and offer the Message
Camera/trademark/ to their corporate clients throughout the world.
SMILETIME/trademark/ CAMERAS - the Company markets its
Smiletime/trademark/ camera line both as part of its ancillary imaging business
through mass catalog distribution and telemarketing sales as well as through
numerous sales representative organizations that may include the same
representative organizations that market the Message Camera/trademark/. Most of
the Smiletime/trademark/ sales are to independent specialty retailers, tobacco,
sundry, and health and beauty aid wholesalers.
PRIVATE LABEL/LOGO CAMERAS - the Private Label/Logo camera line is
currently marketed by a number of the independent sales representative
organizations. This line of cameras is overseen by the Company's Vice President
of Sales who is responsible for marketing the line to mass retailers and
regional chains. Among these retailers and wholesalers are K-Mart, Family Dollar
Stores and Bergen Brunswig Company (distributors to approximately 2,200
independent drug stores). The Company has recently been appointed the exclusive
vendor for private label/logo cameras for Cardinal Health, Inc., which services
2,500 retail pharmacies nationwide.
In February 1999, the Company formed an internet alliance with Party
City Corp. ("Party City"). Under the terms of such alliance the Company will
place a hyperlink within its web page for the consumer to directly jump to the
web page of Party City. The Party City web page will direct the consumer to the
closest Party City store location where the Message Camera(/trademark/) is
offered for sale.
SIGNIFICANT CUSTOMERS
During 1997 and through September 30, 1998, no customer accounted for
more than 10% of net sales.
MANUFACTURING AND SUPPLIES
ANCILLARY IMAGING AND CAMERA DIVISION - management believes that astute
purchasing is one of the key ingredients of the profitability of the Company's
ancillary imaging division business. Brand name film and photographic supplies
are purchased from what management perceives to be the best available sources
based on price and availability. Certain sources represent brand name, high
26
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quality film and supplies manufactured domestically and abroad and purchased by
the Company at competitive prices.
The Company is also a distributor for Eastman Kodak Company, Agfa
Corporation, Polaroid Corporation and Imation Corp. products. During fiscal
1997, approximately 18% of the Company's total purchases of ancillary imaging
products were from Eastman Kodak.
The Company maintains an inventory of its product in its 18,000 sq. ft.
facility at its corporate headquarters in Boca Raton, Florida. The Company also
maintains inventory in the People's Republic of China and Hong Kong at its
manufacturing sources.
MESSAGE CAMERAS/trademark/ - the Company has recently developed its own
proprietary manufacturing method of imprinting messages and creative images on
color film. The imprinting process on the Message Camera/trademark/ is performed
at the Company's facility in Boca Raton, Florida. To date, the product has been
marketed under a license with Polaroid utilizing Polaroid's patent (see
"Licenses, Patents and Trademarks").
Currently, the Company purchases film from two major sources of film
manufacturers for use in its single-use cameras. Agfa Corporation and Imation
Corp. serve as the sources of supply for bulk color negative film.
The Company currently has its cameras manufactured by three separate
sources located in The Peoples Republic of China and Hong Kong. Each of these
manufacturers have been qualified for quality control and dependability. The
Company believes it has several other choices of manufacturers but has chosen
the current three for their reliable history of performance with the Company.
The Company believes its relationships with Eastman Kodak, Agfa,
Imation and its other suppliers are satisfactory and that alternative suppliers
are available if relationships falter or existing suppliers are unable to
maintain standards meeting the Company's requirements. However, there can be no
assurance that the Company's current or future suppliers will be able to meet
the Company's requirements on commercially reasonable terms or within scheduled
delivery times. Any interruption of the Company's arrangements with suppliers
could cause a delay in the acquisition of the Company's products for timely
delivery to its customer base.
The Company is and will be dependent upon foreign contract
manufacturers for the manufacture and assembly of its single-use cameras. By
being dependent upon foreign contract manufacturers, the Company will be subject
to the risks of doing business abroad, such as import duties, trade
restrictions, work stoppages, foreign currency fluctuations, political
instability, difficulties in enforcing the manufacturer's obligations to the
Company and other factors which could have an adverse impact on the business of
the Company. The three manufacturers currently supplying the Company all have
the capability of supplying new casings as opposed to recycled.
See "LEGAL PROCEEDINGS" for information with regard to an action
instituted in February 1998 before the International Trade Commission by Fuji
Film in which the Company is one of 28 respondents. The action seeks an import
exclusion order against all defendants based upon claimed patent infringement.
In February 1999 an Administrative Law Judge ruled in favor of Fuji and the
matter is currently subject to review by the International Trade Commission.
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COMPETITION
There are a number of distributors and wholesalers of photographic
supplies and equipment that actively compete with the Company. In some areas,
competition is directly with the manufacturers of these products. Many of these
companies have substantially greater financial, technical and other resources
than the Company and have established reputations for success in the
development, licensing and sale of their products and technology. Some of the
Company's direct competitors in its ancillary imaging and camera business
include Unique Photo, Concord Camera Corporation and Jazz Photo Corp. Unique is
a reseller of photo supplies and single-use cameras. Concord and Jazz market
cameras only and not other ancillary imaging products, as is the case with the
Company. Although select areas of price competition is intense in the Company's
ancillary imaging and camera business, the Company believes that it has certain
competitive advantages by virtue of its proprietary product lines, its
well-developed relationships with vendors and broad customer base allowing it to
provide a one-stop source of products for its customers.
There are two known competitors, DCC Compact Classics and Fairway
Performance, which have begun to market a camera similar to the Message
Camera/trademark/. However, due to the Company's marketing and product
positioning over the past three years the Company believes it has taken a
leadership position in the marketplace. The Company has also recently become
aware that there may be one or more foreign manufacturers that have employed
pre-imaging messages into single-use cameras. These cameras, to the best of the
Company's knowledge, are not a threat to the Company's future performance levels
and the Company is unaware of any cameras being marketed domestically or
internationally.
Other companies including Eastman Kodak, Fuji, Agfa and Polaroid
currently market single-use cameras. Although these companies have substantially
greater financial resources than the Company, none have marketed any camera
containing pre-imprinted messages onto color negative film.
LICENSES, PATENTS AND TRADEMARKS
POLAROID LICENSE - effective November 1, 1997 the Company entered into
a license agreement with the Polaroid Corporation ("Polaroid") under which the
Company received a non-exclusive license to manufacture and sell single-use
cameras containing pre-exposed film worldwide under Polaroid's patent for a
single-use camera containing pre-exposed film. The license, which continues
until the Polaroid patent expires, is terminable upon 60 days' notice by the
Company at any time and calls for the payment of a royalty to Polaroid of the
greater of $.30 per camera or 5% of the net selling price.
PSI PATENT APPLICATIONS - in July 1998 the Company filed a patent
application with the U.S. Patent and Trademark Office relating to new and unique
methods for pre-burning a color latent image onto color negative film. In
addition, in November 1998 the Company filed another patent application with the
U.S. Patent and Trademark Office relating to an invention regarding an
alternative method utilizing the single-use camera system to be loaded with film
outside of a dark room. Although the Company believes that if these patents are
issued they may be of considerable value and importance to its business, there
can be no assurance that the applications will result in the issuance of a
patent or patents, or that if patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated.
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The Company has also applied for trademark registrations for the
Message Camera/trademark/, Smiletime/trademark/ and Sharp Color Film/trademark/.
EMPLOYEES
At February 1, 1999, the Company had 36 employees, 10 of whom are
engaged in marketing and sales, 10 in assembly, warehousing and shipping, and 16
in management and administration. The Company's employees are not represented by
a collective bargaining unit. The Company considers relations with its employees
to be good.
LEGAL PROCEEDINGS
The Company is a defendant in an action filed in the Circuit Court of
Orange County, Florida in February 1998 by Keepsake, Inc. The action is for,
among other things, breach of contract (failure to make royalty payments). The
Company has asserted counterclaims against the plaintiff for tortious
interference with contractual and advantageous business relationships,
misappropriation of trade secrets, defamation, conversion and fraud and
negligent misrepresentation. The Company seeks damages and injunctive relief.
The action is at the discovery stage. No trial has been set. The
Company intends to vigorously contest the plaintiff's claims and prosecute its
counterclaims. While the Company believes it has a strong case, given the
complexity of the issues involved, it is unable to evaluate the likelihood of a
favorable or unfavorable outcome at this time. An estimate of the amount or
range of potential loss or gain cannot be made at this time.
The Company is a defendant in an action filed in the U.S. District
Court for the Middle District of Florida (Orlando Division) in November 1998 by
Keepsake, Inc. and Loura Dobbs. The other defendants are Walgreen Company, Party
City Corp. and K-Mart Corp. The action is for, among other things, unfair
competition and patent infringement. The Company intends to vigorously contest
the complainants' claims.
In December, 1998, the Company commenced an action in the Circuit Court
of Palm Beach County, Florida against Keepsake, Inc., The Edge Sports,
Promotional Designs, Inc., Playboy Enterprises, Inc. and Custom Camera Design.
In the action, the Company is seeking damages and injunctive relief for claims
of trademark infringement, tradename infringement, trade dress infringement and
unfair competition arising out of the defendants' manufacture, marketing,
distribution and sale of a disposable, single-use camera containing, among other
things, the Company's trademark, Message Camera/trademark/, as well as the
Company's tradename, PSI Industries, Inc. Defendants' responses to the complaint
have not yet been served.
In June of 1998, the Company commenced an action in the Circuit Court
of Palm Beach County, Florida, against Jonathan Barash, a former employee. In
the action, the Company seeks injunctive relief and damages for breach of a
confidentiality agreement and misappropriation of trade secrets. As of October
30, 1998, the Company had succeeded in obtaining a temporary injunction against
Mr. Barash, his agents and/or any other persons acting with him, enjoining them
from using, communicating (either orally or in writing), disclosing,
disseminating and misappropriating any documents, information or computer
records of the Company as well as any trade secret information. Mr. Barash, his
agents and/or any other persons acting with him are also enjoined from
soliciting and
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contacting the Company's customers, distributors and sales representatives and
from competing with the Company through and including May 19, 1999 and must
return to the Company forthwith all originals and copies of the Company's
documents and computer records.
The Company is one of 28 respondents in an action instituted in
February 1998 before the International Trade Commission by Fuji Film. The action
in which Fuji alleges violation of a number of its patents seeks an import
exclusion order against all of the respondents. The Company has asserted
defenses of non-infringement, patent invalidity and estoppel. In November 1998 a
hearing was conducted before the International Trade Commission and on February
26, 1999, the Administrative Law Judge ruled in favor of Fuji potentially
eliminating the Company's use of recycled cameras. Although such ruling is not
the final decision of the International Trade Commission, nor is it binding or
enforceable, there can be no assurance the International Trade Commission will
change such ruling. However, the Company has completed the design and
development of a new 35mm camera which management believes should eliminate any
potential conflict or infringement within any of the Fuji patents. Therefore,
even if Fuji Film prevails, the Company believes that this will not have a
material effect on the Company's business.
DESCRIPTION OF PROPERTY
The Company currently owns an industrial building of approximately
18,000 square feet in Boca Raton, Florida. The Company maintains its principal
executive and administrative offices and warehouse space at this facility. The
Company financed the acquisition of the facility in January 1997 by a bank
mortgage, which was refinanced in December 1998 with a new bank mortgage in the
principal sum of $570,000 payable over a term of five years and bearing interest
at the rate of 8% per annum. The mortgage has been guaranteed by Dominick
Seminara and his wife. See "CERTAIN TRANSACTIONS".
The Company believes that existing facilities are adequate for its
needs through at least the end of 1999. Should the Company require additional
space at that time, or prior thereto, it believes that such space can be secured
on commercially reasonable terms and without undue operational disruption.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, positions with the Company
and ages of the executive officers and directors of the Company. All directors
serve until the next annual meeting of the Company's shareholders or until their
successors are elected and qualify. Officers are elected by the Board and their
terms of office are, except to the extent governed by employment contract, at
the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dominick M. Seminara (1)(2) 60 Chief Executive Officer and
Chairman of the Board of Directors
Benjamin Cohen (1) 61 President, Chief Operating Officer
and Director
Mirco Vietti 40 Executive Vice President and
Director
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin D. Epstein 47 Vice President of Finance and
Administration, Chief Financial
Officer, Treasurer, Secretary
and Director
George A. Erfurt 54 Vice President of Sales
Richard Proodian 59 Vice President of Operations
Lisa A. Davidson 33 Director
Nico B.M. Letschert (2) 44 Director
Cornelis F. Wit (1) 52 Director
</TABLE>
- ----------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
DOMINICK M. SEMINARA was a co-founder of the Company in 1986. He has
served as the Company's Chief Executive Officer and Chairman of the Board from
the Company's formation. From inception to January 1997, he had also served as
the Company's President. Mr. Seminara's prior business experience includes over
35 years of experience in photographic wholesale distribution, and retail and
photo processing.
BENJAMIN COHEN has served as the Company's President and Chief
Operating Officer and a Director since January 1997. From 1986 through January
1997, he was the President, Chief Executive Officer and founder of Marketing
Dynamics Group, a consulting company which specialized in marketing, sales
enhancement programs, product development and creative services for consumer
product manufacturers with a particular emphasis on the toy and gift industries.
Through his consulting firm, commencing from August 1996 through December 1996,
he provided consulting services to the Company. From 1985 to 1986, he was the
Corporate Vice President of Marketing for Viewmaster/Ideal. From 1983 to 1985,
he was the Divisional President and Senior Vice President and member of the
Executive Committee of Mattel Toys. Prior to that, commencing in 1979, he was
the Executive Vice President and Senior Vice President of Knickerbocker Toy
Company, a division of Warner Communications.
MIRCO VIETTI was a co-founder of the Company in 1986. He has served as
the Company's Executive Vice President and a Director since its formation. He
currently oversees the Company's purchasing operations for its ancillary imaging
division.
MARTIN D. EPSTEIN joined the Company in July 1998 as Vice President of
Finance and Administration and Chief Financial Officer. He was also elected to
the Board of Directors on July 31, 1998. Prior to that he was a Financial
Officer of Technical Chemicals and Products, Inc., a manufacturer and
distributor of medical diagnostic products from 1995 to 1998. From 1988 to 1995
he was Controller with Furniture Consultants, Inc., a distributor of office
furniture. From 1985 to 1988 he served as Controller of FTC Communications,
Inc., an international telecommunications company. Mr.
31
<PAGE>
Epstein is a CPA and obtained his undergraduate degree from Brooklyn College and
received his MBA in Business Administration from Dowling College.
GEORGE A. ERFURT joined the Company in July 1997 as Vice President of
Sales. Prior to that he was the President of Sunset Sales Company, a consulting
company he organized which specialized in sales and marketing services. From
1991 through 1997 he served in various positions at Concord Camera Corp., most
recently as Vice President of Sales and National Accounts. From 1986 to 1991 he
was the Executive Vice President of Sales and Marketing of Keystone Camera
Products in Clifton, New Jersey.
RICHARD PROODIAN has been the Company's Vice President of Operations
since July 1998. Prior to that he had been the Company's Chief Financial Officer
since July 1997. In August 1997, he also became a member of the Board of
Directors. Prior to July 1997, he served as the Company's Vice President of
Finance and Operations, a position he assumed in March 1997. From 1986 through
December 1996, he was a partner of the American Financial Consultants, a
financial and business consulting firm he co-founded, which provides business
consulting services. Through his consulting firm, commencing in August 1996, he
provided consulting services to the Company. From 1983 to 1986, he served as
President of Sun Dazzlers, Inc., a company he founded, which was a manufacturer
of imitation stained glass products for the hobby craft market. From 1977 to
1983, he was the Vice President and General Manager of Makit & Bakit Division of
Fundementions, a toy division of General Mills, which manufactured imitation
stained glass products sold to the hobby, craft and toy markets. In 1995, Mr.
Proodian filed a petition under Chapter 13 of the Federal Bankruptcy Laws, which
proceeding is still pending.
LISA A. DAVIDSON, a 1987 graduate of Maryland University, has served as
Director of the Company since July 1987. From that date until September, 1998,
she served as Senior Vice President of the Company.
NICO B.M. LETSCHERT, a director of the Company since September 1997, is
the Chief Executive Officer of Noesis Capital Corp. ("Noesis"), which
specializes in corporate finance and money management. He previously served as
President of Noble Investment Co. of Palm Beach, Florida, an investment banking
firm. He was educated at the Dutch Institute for Banking and Finance, and is a
certified financial planner and a director of Futuremedia PLC.
CORNELIS F. WIT, a director of the Company since September 1997, is the
President-Corporate Finance of Noesis. He was formerly President and CEO of DMV,
Inc., the North American subsidiary of Campina Melkunie. Prior to this
involvement with DMV, Mr. Wit was Vice President-International Operations with
Duphar, where he was responsible for worldwide operations of its pharmaceutical
division. Prior to joining Duphar, Mr. Wit was with Organon (Akzo-Pharma) as
president of several different subsidiaries over a 12-year period. Mr. Wit has
spent his entire career working with international companies and has extensive
experience with crisis management and cross cultural negotiations. Mr. Wit has
lived in eight different countries during his career and is fluent in Dutch,
Spanish, Italian, English and German. He has a degree in business administration
from the University of Nijenrode in the Netherlands.
Dominick M. Seminara is Mirco Vietti's father-in-law and Lisa
Davidson's father.
32
<PAGE>
BOARD COMMITTEES
The Compensation Committee will administer the Company's stock option
plan and make recommendations to the full Board of Directors concerning
compensation, including bonuses and incentive arrangements, of the Company's
officers and key employees. The Audit Committee will review the engagement of
the independent accountants and review the independence of the accounting firm,
as well as review the audit and non-audit fees of the independent accountants
and the adequacy of the Company's internal accounting controls.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information relating to the compensation
paid by the Company during the past three fiscal years to: (i) the Company's
President and Chief Executive Officers; and (ii) each of the Company's executive
officers who earned more than $100,000 during the fiscal year ended December 31,
1998 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------ ---- -------- ----- ------------
<S> <C> <C> <C> <C>
Dominick M. Seminara, 1998 $198,683 $0 $16,160(1)
Chief Executive Officer 1997 $154,356 $0 $0
1996 $126,226 $0 $41,216(2)
Benjamin Cohen, 1998 $160,119 $0 $23,695(3)
President and Chief 1997 $136,462 $0 $111,594(4)
Operating Officer
Mirco Vietti, 1998 $177,742 $0 $15,161(5)
Executive Vice President 1997 $129,320 $0 $0
1996 $119,846 $0 $44,979(6)
</TABLE>
- ----------
(1) Includes $16,160 paid for Mr. Seminara for an automobile lease and
related costs in 1998.
(2) Includes $29,228 in 1996 representing dividends distributed while the
Company was a Subchapter S corporation. Also includes $11,988 paid for
Mr. Seminara for an automobile lease and related costs in 1996.
(3) Includes $23,695 paid for Mr. Cohen for an automobile lease and related
costs in 1998.
(4) Represents the amount of deferred compensation of shares of restricted
stock received by Mr. Cohen that vested during 1997.
(5) Includes $15,161 paid for Mr. Vietti for an automobile lease and
related costs in 1998.
(6) Includes $29,228 in 1996 representing dividends distributed while the
Company was a Subchapter S corporation. Also includes $15,751 paid for
Mr. Vietti for an automobile lease and related costs in 1996.
EXECUTIVE EMPLOYMENT AGREEMENTS
Effective January 1, 1997, the Company entered into an Employment
Agreement with Benjamin Cohen, whereby Mr. Cohen was employed as President and
Chief Operating Officer of the Company.
33
<PAGE>
The Agreement is for a term of five years and provides for an initial annual
base salary of $180,000, to be increased to $250,000 upon completion of this
Offering of its securities. Mr. Cohen agreed to a reduction in his salary
for 1997. In connection with the Agreement, Mr. Cohen received a grant of
1,164,470 shares of restricted stock. 388,156 shares vested as of January 1,
1997, and the remaining shares vested pro-rata on a monthly basis over the
period from February 1, 1997, through January 1, 1999.
Effective July 1, 1997, the Company entered into a three-year Employment
Agreement with George Erfurt. Under such agreement, Mr. Erfurt serves as the
Company's Vice President of Sales and receives an annual base salary in the
amount of $100,000. In addition, he is entitled to receive a sales commission of
1 1/2% on certain sales he makes of the Company's one-time-use cameras as well
as a 1% override commission on all sales of one-time-use cameras. At the time of
signing of the Agreement, Mr. Erfurt received 15,000 vested stock options
exercisable at a price of $.15 per share, which he subsequently exercised in
1997. He is also entitled to additional options based upon certain performance
standards of the Company's sales of one-time-use cameras.
STOCK OPTIONS
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of common stock during the fiscal year ended December
31, 1998, to the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF %OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARES) DATE
- ---- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Dominick M. Seminara 0 0 0 0
Benjamin Cohen 0 0 0 0
Mirco Vietti 0 0 0 0
</TABLE>
1996 STOCK OPTION PLAN
In March of 1996, as amended in January 1999 and February 1999, the
Board of Directors adopted and the stockholders approved the 1996 Stock Option
Plan (the "Plan"). The Plan will work to increase the employees', board of
advisors, consultants' and non-employee directors' proprietary interest in the
Company and to align more closely their interests with the interests of the
Company's stockholders. The Plan will also maintain the Company's ability to
attract and retain the services of experienced and highly qualified employees
and non-employee directors.
Under the Plan, the Company has reserved an aggregate of 3,500,000
shares of Common Stock for issuance pursuant to options granted under the Plan
("Plan Options"). The Board of Directors or a Committee of the Board of
Directors (the "Committee") of the Company will administer the Plan,
34
<PAGE>
including, without limitation, the selection of the persons who will be granted
Plan Options under the Plan, the type of Plan Options to be granted, the number
of shares subject to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
Directors or the Committee, provided that no Plan Option may be exercisable more
than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the date of the grant. The exercise
price of Non-Qualified Options shall be determined by the Board of Directors or
the Committee.
The per share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.
Officers, directors, key employees and consultants of the Company and
its subsidiaries (if applicable in the future) will be eligible to receive
Non-Qualified Options under the Plan. Only employees of the Company who are
employed by the Company or by any subsidiary thereof are eligible to receive
Incentive Options.
All Plan Options are non-assignable and non-transferable, except by
will or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a Director is terminated for
any reason, other than death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of termination. If the optionee dies during the term of his
employment, the Plan Option granted to him shall lapse to the extent unexercised
on the earlier of the expiration date of the Plan Option or the date one year
following the date of the optionee's death. If the optionee is disabled, the
Plan Option granted to him lapses to the extent unexercised on the earlier of
the expiration date of the option or one year following the date of such
disability.
The Board of Directors or the Committee may amend, suspend or terminate
the Plan at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan, or (ii) changes the definition
of an Eligible Person under the Plan.
35
<PAGE>
As of February 1, 1999, 1,428,783 Plan Options have been granted
pursuant to the Plan, all of which were vested as of the date of grant and of
which 2,100 Plan Options have been forfeited by the optionee's termination from
employment with the Company. As of the same date, 1,379,633 options had been
exercised.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise
of options to purchase shares of Common Stock during the fiscal year ended
December 31, 1998 to the named executive officers and the unexercised options
held as of the end of the 1998 fiscal year.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and 1998 Fiscal Year-End Option/SAR Values
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS/
SHARES UNEXERCISED OPTION SARS AT 1997 FISCAL
ACQUIRED VALUE AT 1997 FISCAL YEAR YEAR END ($)
ON EXERCISE REALIZED(1) END (#) EXERCISABLE/ EXERCISABLE/
(#) ($) UNEXERCISABLE UNEXERCISABLE
----------- ----------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Dominick M. Seminara 0 0 None 0
Benjamin Cohen 0 0 None 0
Mirco Vietti 0 0 None 0
</TABLE>
- ----------
(1) Based on the Company's determination of fair market value of the
purchased shares on the option exercise date less the exercise price
paid for the shares.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF SHARES PERFORMANCE OR NON-STOCK PRICE-BASED PLANS
UNITS OR OTHER OTHER PERIOD UNTIL ------------------------------------
RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM
(#) PAYOUT ($OR #) ($OR #) ($OR #)
---------------- ------------------ --------- ------- -------
<S> <C> <C> <C> <C> <C>
Dominick M. Seminara 0 0 0 0 0
Benjamin Cohen 0 0 0 0 0
Mirco Vietti 0 0 0 0 0
</TABLE>
CERTAIN TRANSACTIONS
In 1992, the Company advanced the sum of $138,098 to Photoline
Partners, a general partnership comprised of Dominick Seminara, Carol Seminara,
his wife, Mirco Vietti, his son-in-law, Deborah Vietti, his daughter and Mr.
Vietti's wife, and Lisa Davidson, his daughter (collectively the
36
<PAGE>
"Shareholders"). In 1996, as distributions for the period during which the
Company was a Subchapter S corporation, the aggregate additional sum of $117,138
was distributed to the Shareholders.
On January 1, 1997, in connection with the issuance of shares to the
Company's new President, Benjamin Cohen, the Shareholders sold an aggregate of
1,164,470 shares to the Company at a purchase price of $.15 per share. The
purchase price for the redeemed shares was paid by the Company's forgiveness and
cancellation of the promissory note to Photoline Partners and the forgiveness of
the sum of $36,572 of advances due to the corporation by the Shareholders.
In 1996 and 1997, the Company made certain advances and paid certain
expenses to Dominick Seminara, Benjamin Cohen, Mirco Vietti and Lisa Davidson.
As of December 31, 1997, the aggregate of these advances which represent loans
payable to the Company totalled $362,681. The amount of each of these officers'
loan accounts as of December 31, 1997 was $152,462 for Mr. Seminara, $86,698 for
Mr. Cohen, $83,970 for Mr. Vietti, and $39,551 for Mrs. Davidson. Although the
loans are due on demand, the Company does not currently intend to demand
repayment prior to the Effective Date.
The mortgage on the building owned by the Company has been personally
guaranteed by Dominick Seminara and Carol Seminara. In connection with the
provision of the guaranty to the bank, the Company and the guarantors entered
into an agreement under the terms of which the Company agreed to a transfer of
the property to guarantors in the event that the guarantors are required to
repay the mortgage to the bank. See "DESCRIPTION OF PROPERTY".
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and
as adjusted to reflect the sale of the Units offered hereby, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially five percent (5%) or more
of the outstanding Common Stock, (ii) each director of the Company, (iii) the
executive officers of the Company, and (iv) all directors and officers as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES ---------------------------
NAME AND ADDRESS OF OF COMMON STOCK BEFORE AFTER
BENEFICIAL OWNERS (1)(2) BENEFICIALLY OWNED OFFERING OFFERING(3)
- ------------------------ ------------------ -------- -----------
<S> <C> <C> <C>
Dominick M. Seminara (4) 2,175,606 20.5%
Benjamin Cohen 1,126,970 10.6%
Mirco Vietti (5) 2,386,605 22.5%
Carol J. Seminara (6) 2,175,606 20.5%
Lisa A. Davidson 870,970 8.2%
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES ---------------------------
NAME AND ADDRESS OF OF COMMON STOCK BEFORE AFTER
BENEFICIAL OWNERS (1)(2) BENEFICIALLY OWNED OFFERING OFFERING(3)
- ------------------------ ------------------ -------- -----------
<S> <C> <C> <C>
Deborah A. Vietti (7) 2,386,605 22.5%
2599 N.W. 63rd Street
Boca Raton, Florida 33496
Richard Proodian 50,000 *
George Erfurt 15,000 *
Nico B.M. Letschert (8) 202,777 1.9%
1801 Clint Moore Road
Suite 100
Boca Raton, Florida 33487
Cornelis F. Wit -- *
1801 Clint Moore Road
Suite 100
Boca Raton, Florida 33487
Martin Epstein (9) 25,000 *
All Executive Officers and Directors 6,852,928 63.1%
as a Group (9 persons)
</TABLE>
- ----------
* Less than 1%
(1) Unless otherwise indicated below, the persons in the table above have
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of
this Prospectus upon the exercise of options. Each person's percentage
of ownership is determined by assuming that any options held by such
person have been exercised.
(2) Unless otherwise indicated below, the address of each person is c/o the
Company at 1160 B South Rogers Circle, Boca Raton, Florida 33487.
(3) For the purposes of this calculation, the number of shares of Common
Stock outstanding have been deemed to include shares of Common Stock
issuable upon conversion of the Series C Preferred Stock which are
included in the Units which are the subject of the Offering.
(4) Includes 984,469 shares held by Carol Seminara, Mr. Seminara's wife, as
to which Mr. Seminara disclaims beneficial ownership.
(5) Includes 1,001,719 shares held of record by Deborah Vietti, Mr.
Vietti's wife, as to which Mr. Vietti disclaims beneficial ownership
and 183,166 shares held jointly with his wife.
(6) Includes 1,191,137 shares held by Dominick Seminara, her husband, as to
which Mrs. Seminara disclaims beneficial ownership.
(7) Includes 1,201,720 shares held by Mirco Vietti, her husband, as to
which Mrs. Vietti disclaims beneficial ownership and 183,166 shares
held jointly with her husband.
38
<PAGE>
(8) Includes 202,777 shares underlying warrants issued to Noesis Capital
Corp., the placement agent of the Company's 1997 private offering. Mr.
Letschert is the beneficial holder of a majority interest in Noesis
Capital Corp.
(9) Includes 25,000 shares of Common Stock underlying immediately
exercisable options.
DESCRIPTION OF SECURITIES
UNITS
Each of the Units offered hereby at $6.00 per Unit consists of one
share of Series C Preferred Stock and one Series II Warrant. The Series C
Preferred Stock and Series II Warrants are detachable and may trade separately
30 days following the Effective Date or on such earlier date as may be
determined by the Underwriter in its sole discretion. Should the Series II
Warrants be exercised, of which there is no assurance, the Company will receive
the proceeds therefrom, aggregating up to an additional $_______.
COMMON STOCK
The authorized Common Stock of the Company consists of 60,000,000
shares of Common Stock, $.0001 par value per share. Immediately prior to the
date of this Prospectus, there were approximately _________ stockholders of
record of the Company. Holders of the Common Stock do not have preemptive rights
to purchase additional shares of Common Stock or other subscription rights. The
Common Stock carries no conversion rights and is not subject to redemption or to
any sinking fund provisions. All shares of Common Stock are entitled to share
equally in dividends from sources legally available therefor when, as and if
declared by the Board of Directors and, upon liquidation or dissolution of the
Company, whether voluntary or involuntary, to share equally in the assets of the
Company available for distribution to stockholders. All outstanding shares of
Common Stock are validly authorized and issued, fully paid and nonassessable,
and all shares to be sold and issued as contemplated hereby, will be validly
authorized and issued, fully paid and nonassessable. The Board of Directors is
authorized to issue additional shares of Common Stock, not to exceed the amount
authorized by the Company's Articles of Incorporation, and to issue options and
warrants for the purchase of such shares, on such terms and conditions and for
such consideration as the Board may deem appropriate without further stockholder
action. The above description concerning the Common Stock of the Company does
not purport to be complete. Reference is made to the Company's Articles of
Incorporation and By-laws which are available for inspection upon proper notice
at the Company's offices, as well as to the applicable statutes of the State of
Florida for a more complete description concerning the rights and liabilities of
stockholders.
Each holder of Common Stock is entitled to one vote per share on all
matters on which such stockholders are entitled to vote. Since the shares of
Common Stock do not have cumulative voting rights, the holders of more than
fifty percent (50%) of the shares voting for the election of directors can elect
all the directors if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any person to the Board of Directors.
39
<PAGE>
PREFERRED STOCK
GENERAL
The authorized Preferred Stock of the Company consists of 2,500,000
shares of Preferred Stock, $.0001 par value per share. Immediately prior to the
date of this Prospectus, there were 48,666.65 shares of Series A Convertible
Preferred Stock, 15,022 shares of Series B Convertible Preferred Stock and no
shares of Series C Preferred Stock issued and outstanding.
Up to 2,436,311.35 additional shares of Preferred Stock may be issued
from time to time in one or more series and the Board of Directors, without
further approval of the stockholders, is authorized to fix the dividend rights
and terms, conversion rights, voting rights, redemption rights, liquidation
preferences and other rights and restrictions relating to any such series. The
issuances of additional shares of Preferred Stock, while providing flexibility
in connection with possible financings, acquisitions and other corporate
purposes, could, among other things adversely affect the voting power of the
holders of other securities of the Company and may, under certain circumstances,
have the effect of deterring hostile takeovers or delaying changes in control or
management of the Company.
SERIES C CONVERTIBLE PREFERRED STOCK
The terms and conditions of the 1,000,000 shares of Series C Preferred
Stock included in the Units are set forth in a Certificate of Designations and
Preferences which is being filed as an exhibit to the Registration Statement of
which this Prospectus is a part. Each share of Series C Preferred Stock shall be
automatically converted without any action on the part of the Company or the
holder thereof into ____ shares of Common Stock on the second anniversary of the
Effective Date. The conversion price is equal to (i) 80% of the average bid
price of the Common Stock for the 20 trading days prior to the Effective Date,
which resulting number shall in no event be less than $1.25, divided into (ii)
the offering price of $5.75 per share of Series C Preferred Stock. No fractional
shares of Common Stock shall be issued upon conversion of the Series C Preferred
Stock, and the number of shares of Common Stock to be issued shall be rounded up
to the nearest whole share. Annual dividends on the Series C Preferred Stock in
respect of the two year period prior to conversion will be at the rate of $0.115
per share. Such dividends shall be payable in cash or shares of Common Stock at
the option of the Company. Holders of Series C Preferred Stock will be entitled
to one vote for each share of Common Stock into which such Preferred Stock is
convertible. Each share of Series C Preferred Stock will be entitled to a
liquidation preference equal to $5.75 per share.
SERIES A CONVERTIBLE PREFERRED STOCK
The holders of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") are entitled to such number of votes as are equal to the
number of shares into which their holdings of Series A Preferred Stock are
convertible (initially 12). The holders of Series A Preferred Stock vote,
together with the holders of Common Stock, as a member of a single class. There
is no cumulative voting with respect to election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors then up for election.
The holders of the Series A Preferred Stock are entitled to a
cumulative annual dividend of $1.50 per share, payable semi-annually in cash on
July 1 and January 1 of each year, with the first dividend payment paid January
1, 1998. The Series A Preferred Stock are convertible into 12 shares of Common
Stock at any time. The conversion price shall be subject to the following
adjustment: in the event that the average of the Company's earnings per share
for its 1997 and 1998 fiscal years, on a fully diluted basis, as reflected on
the Company's audited financial statements for each of these fiscal
40
<PAGE>
years (the "Average EPS"), is less than $.20 per share, then the conversion
price shall be reduced to a number that equals 15 times the Average EPS, except
that in no event shall it be reduced to a price that is lower than $2.50. In
recognition of the fact that the agreed upon adjustment based on the Average EPS
will clearly need to be made, the Company agreed in November 1998 to adjust the
price to $2.50. The shares of Series A Preferred Stock also have certain
anti-dilution protection and there shall be appropriate adjustments in the
conversion price and/or number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock in the event of stock dividends,
stock-splits, recapitalizations and sales of shares of Common Stock at a price
that is below the then current conversion price if there is a decrease in the
Company's tangible book value per share.
At any time after one year from the date of issuance of the Series A
Preferred Stock, the Company can require that all outstanding shares of Series A
Preferred Stock be automatically converted at the conversion price then in
effect if at the time: (i) the closing bid price of the Company's Common Stock
has exceeded $7.50 per share for a period of 20 consecutive trading days, (ii)
the Company's Common Stock has been listed on NASDAQ or another national
securities exchange and (iii) a registration statement covering the shares of
Common Stock issuable upon conversion of the Series A Preferred Stock has been
filed with the Securities and Exchange Commission and declared effective.
In the event of liquidation, dissolution or winding up of the Company,
the holders of the Series A Preferred Stock are entitled to share ratably with
all other holders of preferred stock (of all series outstanding) and all assets
remaining available for distribution after payment of liabilities, but before
any payments are made to the holders of Common Stock, up to $30 per share, plus
any accrued but unpaid dividends.
The holders of the Series A Preferred Stock have "piggy-back"
registration rights which entitles them to have their shares included in any
registration statement (other than in connection with a merger or pursuant to
Forms S-8 or S-4) any time until December 31, 2000. In addition, the holders of
the Series A Preferred Stock acting by a majority in interest, have the right on
one occasion at any time after one year after the date of issuance of the
Preferred Stock to require the Company to register their shares.
SERIES B CONVERTIBLE PREFERRED STOCK
The holders of the Series B Convertible Preferred Stock (the "Series B
Preferred Stock") do not have any voting rights, except as otherwise provided by
the laws of the State of Florida. They do not receive any dividends on their
shares. Each share of Series B Preferred Stock is convertible into 11.1 shares
of Common Stock at any time. The shares of Series B Preferred Stock also have
certain anti-dilution protection and there shall be appropriate adjustments in
the conversion price and/or number of shares of the Common Stock issuable upon
conversion of the Series B Preferred Stock in the event of stock dividends,
stock splits and recapitalizations. In the event of liquidation, dissolution or
winding up of the Company, the holders of Series B Preferred Stock are entitled
to share ratably with all other holders of preferred stock (of all series
outstanding) and all assets remaining available for distribution after payment
of liabilities, but before any payments are made to holders of Common Stock, up
to $100 per share.
41
<PAGE>
COMMON STOCK PURCHASE WARRANTS
In connection with the completion of the Company's private placement
offering in December of 1997, the Company issued to the placement agent common
stock purchase warrants to purchase 202,777 shares of Common Stock. The warrants
are exercisable at a purchase price of $3.00 per share at any time subsequent to
December 30, 1998 and prior to December 30, 2002. In the event that the average
of the Company's earnings per share for its fiscal years of 1997 and 1998, on a
fully diluted basis (the "Average EPS"), is less than $.20 per share, the
exercise price shall be reduced to a number that equals 15 times the Average
EPS, provided that in no event shall the exercise price be reduced below $2.50.
In November 1998, the Company agreed to a reduction of the exercise price to
$2.50 and to a further reduction in February 1999 to $1.50. In February 1999,
the Company agreed to extend the expiration date until December 30, 2003.
SERIES II WARRANTS
The Series II Warrants shall be exercisable commencing one year from
the Effective Date. Each Series II Warrant entitles the holder to purchase
during the four year period commencing one year from the Effective Date one
share of Common Stock at an exercise price of 115% of the average bid price for
the 20 trading days prior to the Effective Date. The Common Stock underlying the
Warrants will, upon exercise of the Warrants, be validly issued, fully paid and
nonassessable. The Series II Warrants will be subject to redemption by the
Company, at any time after one year from the Effective Date, for $.05 per
Warrant, upon 30 days' prior written notice, if the closing bid price of the
Common Stock, as reported by the exchange on which the Company's Common Stock is
traded, exceeds 170% of the closing bid price of the Common Stock on the
Effective Date ($ _____ per share) for any 20 consecutive trading days ending
within ten days prior to the date of the notice of redemption.
The Series II Warrants can only be exercised when there is a current
effective registration statement covering the shares of Common Stock underlying
the Series II Warrants. If the Company does not or is unable to maintain a
current effective registration statement the Series II Warrant holders will be
unable to exercise the Series II Warrants and the Series II Warrants may become
valueless. Moreover, if the shares of Common Stock underlying the Series II
Warrants are not registered or qualified for sale in the state in which a Series
II Warrant holder resides, such holder might not be permitted to exercise the
Series II Warrants. See "Risk Factors--Requirements of Current Prospectus and
State Blue Sky Registration in Connection with the Exercise of the Series II
Warrants Which May Not Be Exercisable and May Therefore Be Valueless".
The Company will deliver Series II Warrant certificates to the
purchasers of Units representing one Series II Warrant for each Unit purchased.
Thereafter, Series II Warrant certificates may be exchanged for new certificates
of different denominations, and may be exercised or transferred by presenting
them at the offices of the Transfer Agent. Holders of the Series II Warrants may
sell the Series II Warrants if a market exists rather than exercise them.
However, there can be no assurance that a market will develop or continue as to
such Series II Warrants. If the Company is unable to qualify its Common Stock
underlying such Series II Warrants for sale in certain states, holders of the
Company's Series II Warrants in those states will have no choice but to either
sell such Series II Warrants or allow them to expire.
Each Series II Warrant may be exercised by surrendering the Series II
Warrant certificate, with the form of election to purchase on the reverse side
of the Series II Warrant certificate properly completed and executed, together
with payment of the exercise price to the Series II Warrant Agent.
42
<PAGE>
The Series II Warrants may be exercised in whole or from time to time in part.
If less than all of the Series II Warrants evidenced by a Series II Warrant
certificate are exercised, a new Series II Warrant certificate will be issued
for the remaining number of Series II Warrants.
Holders of the Series II Warrants are protected against dilution of the
equity interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends other than dividends paid in respect of the Series C Preferred Stock.
If the Company merges, reorganizes or is acquired in such a way as to terminate
the Series II Warrants, the Series II Warrants may be exercised immediately
prior to such action. In the event of liquidation, dissolution or winding up of
the Company, holders of the Series II Warrants are not entitled to participate
in the Company's assets.
For the life of the Series II Warrants, the holders thereof are given
the opportunity to profit from a rise in the market price of the Common Stock of
the Company. The exercise of the Series II Warrants will result in the dilution
of the then book value of the Common Stock of the Company held by the public
investors and would result in a dilution of their percentage ownership of the
Company. The terms upon which the Company may obtain additional capital may be
adversely affected through the period that the Series II Warrants remain
exercisable. The holders of these Series II Warrants may be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain
equity capital on terms more favorable than those provided for by the Series II
Warrants.
Because the Series II Warrants included in the Units being offered
hereby may be transferred, it is possible that the Series II Warrants may be
acquired by persons residing in states where the Company has not registered, or
is not exempt from registration such that the shares of common stock underlying
the Series II Warrants may not be sold or transferred upon exercise of the
Series II Warrants. Series II Warrant holders residing in those states would
have no choice but to attempt to sell their Series II Warrants or to let them
expire unexercised. Also, it is possible that the Company may be unable, for
unforeseen reasons, to cause a registration statement covering the shares
underlying the Series II Warrants to be in effect when the Series II Warrants
are exercisable. In that event, the Series II Warrants may expire unless
extended by the Company as permitted by the Series II Warrant because a
registration statement must be in effect in order for warrant holders to
exercise their Series II Warrants.
In the event that the Series II Warrants are called for redemption, the
Series II Warrant holders may not be able to exercise their Series II Warrants
if the Company has not updated this Prospectus in accordance with the
requirements of the Act or these securities have not been qualified for sale
under the laws of the state where the Series II Warrant holder resides. See
"Requirements of Current Prospectus and State Blue Sky Registration in
Connection with the Exercise of the Series II Warrants Which May Not Be
Exercisable and May Therefore Be Valueless". In addition, in the event that the
Series II Warrants have been called for redemption, such call for redemption
could force the Series II Warrant holder to either (i) assuming the necessary
updating to the Prospectus and state blue sky qualifications have been effected,
exercise the Series II Warrants and pay the exercise price at a time when, in
the event of a decrease in market price from the period preceding the issuance
of the call for redemption, it may be less than advantageous economically to do
so, or (ii) accept the redemption price, which, in the event of an increase in
the price of the stock, could be substantially less than the market value
thereof at the time of redemption.
43
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the securities of the Company is
Florida Atlantic Stock Transfer, Inc., 7130 Nob Hill Road, Tamarac, Florida
33321, telephone number (954) 776-4954.
RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE
There are currently ________ shares of the Company's outstanding Common
Stock that are "restricted securities" which in the future, may be sold upon
compliance with Rule 144 adopted under the Securities Act. Rule 144, as amended,
provides, in essence, that a person holding "restricted securities" which trade
on the OTC Bulletin Board, for a period of one year may sell every three months
a number of shares equal to one percent of the Company's issued and outstanding
shares. The amount of "restricted securities" which a person who is not an
affiliate of the Company may sell is not so limited, since non-affiliates may
sell without volume limitation their shares held for two years. Therefore,
during each three month period, a holder of restricted securities who has held
them for at least the one year period may sell under Rule 144. Non-affiliated
persons who hold for the two-year period described above may sell unlimited
shares once their holding period is met. All of the executive officers of the
Company have agreed not to sell their shares of Common Stock for a period of 12
months from the consummation of the Offering, except for 750,000 shares of
Common Stock subject to a three-year lock-up, without the Representative's prior
written consent. Should the Company fail to achieve at least 80% of its pre-tax
net income projections for any of the next three fiscal years the 750,000 shares
will be cancelled. The pre-tax net income projections for 1999, 2000 and 2001
are $3,005,349, $5,442,021 and $7,835,339, respectively.
REPORTS TO SECURITYHOLDERS
The Company will furnish to holders of its Units, Series C Preferred
Stock, Common Stock and Series II Warrants annual reports containing audited
financial statements. The Company may issue other unaudited interim reports to
its securityholders as it deems appropriate.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase from the Company
800,000 Units offered hereby on a "firm commitment" basis, if any are purchased.
The Underwriter has advised the Company that it proposes to offer the Units to
the public at $6.00 per Unit as set forth on the cover page of this Prospectus
and that it may allow to certain dealers who are NASD members, and such dealers
may reallow, concessions not to exceed $_______ per Unit. After the initial
public offering, the public offering price, concession and reallowance may be
changed by the Underwriter.
The Company has granted an option to the Underwriter, exercisable
during the 30-day period from the date of this Prospectus, to purchase an
additional 15% of the total Units offered to the public at the offering price,
less the underwriting discount, to cover over-allotments, if any.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities
44
<PAGE>
Act may be provided to officers, directors or persons controlling the Company,
the Company has been informed that in the opinion of the Commission, such
indemnification is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance of three percent (3%) of the aggregate offering price of the
Units offered hereby, including any Units purchased pursuant to the
Over-Allotment Option. The Underwriter's Expenses in excess of the stated
expense allowance will be borne by the Underwriter. To the extent that the
expenses of the Underwriter are less than the stated expense allowance, the
difference may be deemed compensation to the Underwriter in addition to the
sales commission payable to the Underwriter. The Company has agreed to pay to
the Underwriter, upon the closing of this Offering, a fee in the amount of
$100,000 in respect of advisory services to be provided by the Underwriter to
the Company over a one-year period. The Company has already paid $50,000 of such
fees.
The Company has agreed to grant to the Underwriter, or its designees an
option ("Underwriter's Purchase Option") to purchase up to an aggregate of
80,000 Units. The Underwriter's Purchase Option shall be exercisable during the
four-year period commencing one (1) year after the Effective Date and will
provide for a demand registration right in favor of the Underwriter. The
Underwriter's Purchase Option may not be assigned, transferred, sold or
hypothecated by the Underwriter after the Effective Date of this Prospectus,
except to officers or partners of the Underwriter or of selling group members in
this offering. Any profits realized by the Underwriter upon the sale of the
Securities issuable upon exercise of the Underwriter's Unit Purchase Option may
be deemed to be additional underwriting compensation. The exercise price of the
Units issuable upon exercise of the Underwriter's Unit Purchase Option during
the period of excercisability shall be not less than 165% of the initial public
offering prices of such Units. The exercise price of the Underwriter's Purchase
Option and the number of Units covered thereby are subject to adjustment in
certain events to prevent dilution. For the life of the Underwriter's Purchase
Option, the holders thereof are given, at a nominal cost, the opportunity to
profit from a rise in the market price of the Company's shares and warrants with
a resulting dilution in the interest of other shareholders. The Company may find
it more difficult to raise capital for its business if the need should arise
while the Underwriter's Unit Purchase Option is outstanding. At any time when
the holders of the Underwriter's Purchase Option might be expected to exercise
it, the Company would probably be able to obtain additional capital on more
favorable terms.
The Company will also pay a warrant solicitation fee to the Underwriter
equal to four percent (4%) of the exercise price of the Series II Warrants on
all Warrants exercised (excluding Warrants exercised by the Underwriter or
certain affiliates of the Company), subject to the Underwriter's compliance with
the rules and regulations of the National Association of Securities Dealers
("NASD"). In accordance with NASD Notice to Members 81-38, no warrant
solicitation fee shall be paid (i) upon exercise where the market price of the
underlying Common Stock is lower than the exercise price; (ii) for the exercise
of warrants held in any discretionary account; (iii) upon the exercise of
warrants where disclosure of compensation arrangements has not been made in
documents provided to customers both as part of the original offering and at the
time of exercise; and (iv) upon the exercise of warrants in unsolicited
transactions. The broker-dealer to receive the warrant solicitation fee must be
designated, in writing, as the soliciting broker. See "Risk Factors -- Exercise
of Series II Warrants May Have Dilutive Effect on Market and Underwriter's
Influence on the Market May Have Adverse Consequences".
45
<PAGE>
If the Company enters into a merger, acquisition, joint venture and/or
other capital business transaction for the Company with another party introduced
to the Company by the Underwriter within a five year period following the
Effective Date, the Company has agreed to pay the Underwriter a fee equal to
five percent of the first $3 million of consideration involved in the
transaction, four percent of the next $3 million, three percent of the next $2
million, two percent of the next $2 million and one percent of the excess, if
any, over $10 million.
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for the Units,
Series C Preferred Stock and Series II Warrants. The Common Stock is listed on
the OTC Bulletin Board. The rate at which the Series C Preferred Stock is
convertible into Common Stock is equal to (i) 80% of the average bid price of
the Common Stock for the 20 trading days prior to the Effective Date, which
resulting number shall in no event be less than $1.25, divided into (ii) the
offering price of $5.75 per share of Series C Preferred Stock. The exercise
price of the Series II Warrants equals 115% of the average bid price for the 20
trading days prior to the Effective Date. The method for setting both the
conversion rate of the Series C Preferred Stock and the exercise price of the
Series II Warrants was the product of negotiations between the Company and the
Underwriter. Among the factors considered in the negotiations were the market
price of the Company's Common Stock, an analysis of the areas of activity in
which the Company is engaged, the present state of the Company's business, the
Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
offering and the demand for similar securities of comparable companies.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for the Company by Atlas, Pearlman, Trop & Borkson, P.A., Fort
Lauderdale, Florida. Certain legal matters will be passed upon for the
Underwriter by Sonfield & Sonfield, Houston, Texas.
EXPERTS
The financial statements of the Company appearing in this Prospectus
have been audited by Feldman Sherb Ehrlich & Co., P.C., independent certified
public accountants to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
46
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors Report....................................... F-2
Consolidated Balance Sheets....................................... F-3
Consolidated Statements of Operations............................. F-4
Consolidated Statements of Stockholders' Equity................... F-5
Consolidated Statements of Cash Flows............................. F-6
Notes to Consolidated Financial Statements........................ F-8
F-1
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors of
PSI Industries, Inc.
We have audited the accompanying consolidated balance sheets of PSI
Industries, Inc. (the "Company") as of December 31, 1997, and 1996, the related
consolidated statements of operations, stockholders equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PSI Industries, Inc.
as of December 31, 1997, and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
September 22, 1998
except for Note 11 as to which
the date is February 26, 1999
F-2
<PAGE>
PSI Industries, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------ -------------------------------
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 96,388 $ 224,680 $ 242,982
Accounts receivable, net of allowance for doubtful
accounts of $170,297 in 1998, $138,142 in 1997
and $107,659 in 1996 4,631,121 4,479,636 1,681,812
Inventories 10,173,459 5,774,263 6,719,457
Deferred income taxes 25,708 25,708 67,295
Prepaid expenses and other current assets 450,069 272,200 338,019
Notes receivable from and advances to related parties 401,594 -- --
------------ ------------ ------------
Total current assets 15,778,339 10,776,487 9,049,565
Notes receivable from and advances to related parties -- 380,613 255,236
Property and equipment, net 1,464,669 1,355,501 338,084
Investment in H & G Venture, Inc. -- -- 706,455
Deferred income taxes -- -- 27,123
Other assets 254,608 624,466 172,003
------------ ------------ ------------
Total assets $ 17,497,616 $ 13,137,067 $ 10,548,466
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 3,605,392 $ 1,984,426 $ 3,611,687
Accrued expenses 587,720 241,460 126,702
Line of credit 6,917,226 7,103,984 3,855,029
Current portion of long-term notes payable 43,900 22,682 26,841
------------ ------------ ------------
Total current liabilities 11,154,238 9,352,552 7,620,259
Deferred income taxes 25,708 25,708 110,292
Long-term notes payable 577,993 517,196 527,550
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value - 20,000,000 shares
authorized, 8,910,743, 8,836,943 and 7,767,610 shares issued
and outstanding in 1998, 1997 and 1996, respectively 891 884 777
Convertible Preferred Stock - Series A, $.0001 par value,
200,000 shares authorized, 48,667 shares issued and
outstanding, $1,460,010 liquidation value 5 5 --
Convertible Preferred Stock - Series B, $.001 par value,
20,000 shares authorized, 15,022 shares issued and
outstanding, $1,502,200 liquidation value 15 -- --
Additional paid-in capital 4,151,771 2,512,925 989,494
Deferred compensation (19,409) (63,076) --
Stock subscription receivable (60,747) (60,747) --
Retained earnings 1,667,151 851,620 1,300,094
------------ ------------ ------------
Total stockholders' equity 5,739,677 3,241,611 2,290,365
------------ ------------ ------------
Total liabilities and stockholders' equity $ 17,497,616 $ 13,137,067 $ 10,548,466
============ ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
PSI Industries, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31,
------------ ------------ ------------------------------
1998 1997 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 21,029,453 $ 17,025,282 $ 23,976,069 $ 14,055,252
Cost of sales 15,857,508 12,620,580 19,179,005 10,628,676
------------ ------------ ------------ ------------
Gross profit 5,171,945 4,404,702 4,797,064 3,426,576
Selling, general and administrative expenses 3,432,734 3,176,898 4,251,152 2,517,044
Product development costs 71,240 122,152 408,486 416,177
------------ ------------ ------------ ------------
Operating income 1,667,971 1,105,652 137,426 493,355
Other expenses:
Interest expense, net of interest income (488,690) (407,372) (582,809) (293,217)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,179,281 698,280 (445,383) 200,138
Income tax provision (benefit) 309,000 251,381 (15,874) 50,675
------------ ------------ ------------ ------------
Net income (loss) $ 870,281 $ 446,899 $ (429,509) $ 149,463
Cumulative preferred stock dividend 54,750 -- 18,965 --
------------ ------------ ------------ ------------
Net income to common stockholders $ 815,531 $ 446,899 $ (448,474) $ 149,463
============ ============ ============ ============
Net income per common share - basic $ 0.09 $ 0.06 $ (0.06) $ 0.02
============ ============ ============ ============
Net income per common share - diluted $ 0.09 $ 0.05 $ (0.06) $ 0.02
============ ============ ============ ============
Weighted average number of common shares - basic 8,601,362 7,208,657 7,392,619 7,326,853
============ ============ ============ ============
Weighted average number of common shares - diluted 9,063,586 8,298,689 7,392,619 7,781,350
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
PSI Industries, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
-------------------------- ------------------------- PAID - IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 1,004,000 $ 100 -- $ -- $ 5,800
Cash distributions to stockholders -- -- -- -- --
Additional shares issued in connection with
6.96-for-one stock split 5,982,818 598 -- -- (598)
Issuance of shares in connection with private
placement, net of issuance costs of $55,427 316,966 32 -- -- 895,439
Issuance of shares to a domestic corporation
for cash 455,926 46 -- -- 65,154
Issuance of shares for legal services 7,900 1 -- -- 23,699
Net income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 7,767,610 777 -- -- 989,494
Pruchase of treasury stock (1,164,470) (116) -- -- (174,554)
Deferred compensation related to issuance of
1,164,470 shares of common stock in
connection with an employment agreement 1,164,470 116 -- -- 174,554
Amortization of deferred compensation -- -- -- -- --
Issuance of Preferred Stock-Series A, net of
issuance costs of $72,733 -- -- 48,667 5 1,387,639
Issuance of common stock for cash 156,000 16 -- -- 15,584
Issuance of common stock for services 397,000 40 -- -- 59,512
Issuance of common stock for subscription
receivable 516,333 51 -- -- 60,696
Preferred stock dividends -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 8,836,943 884 48,667 5 2,512,925
Issuance of Preferred Stock-Series B for inventory -- -- 15,022 15 1,502,185
Issuance of common stock for cash 103,300 10 -- -- 112,938
Issuance of common stock for services 20,500 2 -- -- 28,718
Cancellation of common stock (50,000) (5) -- -- (4,995)
Preferred stock dividends -- -- -- -- --
Deferred compensation amortization -- -- -- -- --
Net income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1998 8,910,743 $ 891 63,689 $ 20 $ 4,151,771
=========== =========== =========== =========== ===========
<CAPTION>
STOCK TOTAL
DEFERRED SUBSCRIPTION RETAINED STOCKHOLDERS'
COMPENSATION RECEIVABLE EARNINGS EQUITY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ -- $ 1,179,631 $ 1,185,531
Cash distributions to stockholders -- -- (29,000) (29,000)
Additional shares issued in connection with
6.96-for-one stock split -- -- -- --
Issuance of shares in connection with private
placement, net of issuance costs of $55,427 -- -- -- 895,471
Issuance of shares to a domestic corporation
for cash -- -- -- 65,200
Issuance of shares for legal services -- -- -- 23,700
Net income -- -- 149,463 149,463
----------- ----------- ----------- -----------
Balance at December 31, 1996 -- -- 1,300,094 2,290,365
Pruchase of treasury stock -- -- -- (174,670)
Deferred compensation related to issuance of
1,164,470 shares of common stock in
connection with an employment agreement (174,670) -- -- --
Amortization of deferred compensation 111,594 -- -- 111,594
Issuance of Preferred Stock-Series A, net of
issuance costs of $72,733 -- -- -- 1,387,644
Issuance of common stock for cash -- -- -- 15,600
Issuance of common stock for services -- -- -- 59,552
Issuance of common stock for subscription
receivable -- (60,747) -- --
Preferred stock dividends -- -- (18,965) (18,965)
Net loss -- -- (429,509) (429,509)
----------- ----------- ----------- -----------
Balance at December 31, 1997 (63,076) (60,747) 851,620 3,241,611
Issuance of Preferred Stock-Series B for inventory -- -- -- 1,502,200
Issuance of common stock for cash -- -- -- 112,948
Issuance of common stock for services -- -- -- 28,720
Cancellation of common stock -- -- -- (5,000)
Preferred stock dividends -- -- (54,750) (54,750)
Deferred compensation amortization 43,667 -- -- 43,667
Net income -- -- 870,281 870,281
----------- ----------- ----------- -----------
Balance at September 30, 1998 $ (19,409) $ (60,747) $ 1,667,151 $ 5,739,677
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
PSI Industries, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------- --------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 870,281 $ 446,899 $ (429,509) $ 149,463
----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Bad debt expense 63,000 34,000 116,000 184,828
Depreciation 63,000 47,000 76,500 48,202
Amortization 43,667 175,177 111,594 72,076
Loss on disposal of asset -- -- 3,693 --
Deferred income taxes -- -- (15,874) 15,874
Issuance of common stock for services 23,720 -- 59,551 23,700
Changes in operating assets and liabilities:
Accounts receivable (214,485) (2,290,078) (2,913,824) (166,781)
Notes receivable (20,981) -- (300,047) --
Inventories (2,896,996) 78,694 945,194 (4,829,316)
Prepaid expenses and other current assets (177,869) 13,862 65,819 (177,598)
Other assets 411,965 20,972 (452,462) (233,462)
Accounts payable 1,620,963 (1,491,902) (1,627,260) 2,968,107
Accrued expenses 346,261 275,608 114,758 115,411
----------- ----------- ----------- -----------
Total adjustments (737,755) (3,136,667) (3,816,358) (1,978,959)
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 132,526 (2,689,768) (4,245,867) (1,829,496)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (66,081) (56,719) (407,055) (103,653)
Proceeds from disposal of property and equipment -- -- 15,900 --
Investment in patents (42,106) -- -- --
Advances to stockholders -- (441,751) -- (117,138)
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (108,187) (498,470) (391,155) (220,791)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(payments to) line of credit, net (186,758) 2,040,439 3,248,955 1,354,237
Proceeds from issuance of common and preferred stock,
net of issuance costs 112,949 929,731 1,403,244 933,315
Principal payments on borrowings (24,072) (24,914) (14,514) (19,270)
Distributions to stockholders (54,750) -- (18,965) (29,000)
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (152,631) 2,945,256 4,618,720 2,239,282
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (128,292) (242,982) (18,302) 188,995
CASH AT BEGINNING OF PERIOD 224,680 242,982 242,982 53,987
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 96,388 $ -- $ 224,680 $ 242,982
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
PSI Industries, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Years ended December 31,
------------------------------- -------------------------
Supplemental disclosures of cash flow information: 1998 1997 1997 1996
----------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Noncash investing and financing activities:
Decrease in investment in H& G Venture, Inc. and
increase in property and equipment $ -- $ 706,455 $ 706,455 $ --
=========== ========= ========= =========
Purchase of equipment for a note payable $ 106,087 $ -- $ -- $ --
=========== ========= ========= =========
Purchase of common stock in exchange for notes receivable
from and advances to related parties $ -- $ 174,670 $ 174,670 $ --
=========== ========= ========= =========
Issuance of common stock related to deferred compensation $ -- $ 174,670 $ 174,670 $ --
=========== ========= ========= =========
Issuance of common stock for services $ 23,720 $ -- $ 59,552 $ 23,700
=========== ========= ========= =========
Issuance of preferred stock for inventory $ 1,502,200 $ -- $ -- $ --
=========== ========= ========= =========
Issuance of common stock for subscriptions receivable $ -- $ -- $ 60,696 $ --
=========== ========= ========= =========
Interest paid $ 266,054 $ 245,650 $ 598,675 $ 299,074
=========== ========= ========= =========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
PSI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
The consolidated balance sheet at September 30,1998 and the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1998 and 1997 and the consolidated statement of stockholders'
equity for the nine months ended September 30, 1998 are unaudited but include
all adjustments which in the opinion of management, are necessary to the fair
presentation of the financial position and results of operations for the periods
then ended. All such adjustments are of normal and recurring nature. The results
of the operations for any interim period are not necessarily indicative of
results of operations for a full fiscal year.
1. ORGANIZATION
PSI Industries, Inc. (the "Company") was incorporated in 1986 under the
laws of the State of Florida. The Company manufactures and distributes
a single-use camera, "The Message Camera." In addition, the Company is
a wholesale distributor of photographic film, cameras, ancillary
photographic equipment and consumer electronics nationwide to wholesale
and retail businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material inter-company transactions have been
eliminated in consolidation.
B. REVENUE RECOGNITION - Sales are recorded at the time merchandise is
shipped and risk of ownership is transferred, and are reported net of
estimated returns and allowances.
C. INVENTORIES - Inventories, consisting primarily of finished goods
held for resale and raw material, are stated at the lower of cost,
determined on the weighted average method or market.
F-8
<PAGE>
D. PROPERTY AND EQUIPMENT - Property and Equipment is carried at cost,
less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the asset which
range from 5 to 30 years.
E. ADVERTISING COSTS - The Company expenses advertising costs when
incurred, with the exception of direct costs associated with the first
showing of advertisements which are deferred until such first showing.
At December 31, 1997, advertising costs deferred and reported as
prepaid expenses and other assets were approximately $242,000.
Advertising costs, included in selling, general and administrative
expenses, totaled approximately $39,000 and $26,000 for 1997 and 1996,
respectively.
F. USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
G. PRODUCT DEVELOPMENT COSTS - Costs related to the design and
development of The Message Camera are expensed as incurred.
H. INCOME TAXES - Prior to March 31, 1996, the Company had elected to
be taxed as an S corporation pursuant to the provisions of the Internal
Revenue Code, which provides that, in general, in lieu of corporate
income taxes, the stockholders shall be taxed on the Company's taxable
income in accordance with their ownership interest. Effective March
31,1996, the Company terminated the S corporation election upon the
completed sale of shares of its common stock to a domestic corporation
(see Note 10). Deferred income taxes are determined on the liability
method in accordance with the Statement of Financial Accounting
Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES.
I. LONG LIVED ASSETS - The Company has adopted SFAS, No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In accordance with this statement, the
Company evaluates the recovery of the carrying amount of its long-lived
assets, primarily property and equipment, whenever events or changes in
circumstances indicate that the carrying amount of such assets may not
be fully recoverable. If this review indicates that the carrying value
of the assets will not be recoverable, as determined based on the
estimated non-discounted cash flows of the Company over their remaining
estimated useful lives, the carrying amount is reduced by the estimated
shortfall of cash flows.
F-9
<PAGE>
J. EARNINGS PER SHARE - The Company has adopted SFAS, No. 128, Earnings
per Share. Net income (loss) per common share has been restated for all
periods presented to conform to the provisions of SFAS No. 128. Basic
earnings (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss)
per share reflects the per share amount that would have resulted if
diluted potential common stock had been converted to common stock, as
prescribed by SFAS No. 128.
3. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash in banks and
trade accounts receivable. The credit risk associated with cash in
banks is considered low due to the credit quality of the institutions.
The Company performs on-going credit evaluations of its trade customers
and generally does not require collateral.
At December 31, 1997 and 1996, accounts receivable include one customer
and three customers representing 18% and 53%, respectively, whose
balance exceeds 10% of aggregate accounts receivable.
4. INVENTORIES
At, December 31, 1997 and 1996, inventories are comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $1,147,599 $ 575,255
Finished goods 4,626,664 6,144,202
---------- ----------
$5,774,263 $6,719,457
========== ==========
</TABLE>
F-10
<PAGE>
5. PROPERTY AND EQUIPMENT
At, December 31, 1997 and 1996, property and equipment is comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Building and building $ 844,320 $ 133,733
improvements
Machinery and equipment 484,583 134,166
Furniture and fixtures 173,044 139,117
Vehicles 69,338 71,368
----------- ---------
1,571,285 478,384
Less: Accumulated depreciation (215,784) (140,300)
----------- ---------
$ 1,355,501 $ 338,084
=========== =========
</TABLE>
6. INVESTMENT IN H & G VENTURE, INC.
On April 24, 1995, the Company entered into a stock purchase agreement
for 35 shares of H & G Venture, Inc.( "H&G"), which represents 35% of
its authorized, issued and outstanding common stock. H&G's sole asset
is a building in which the Company occupies approximately 35% of the
available square footage. During 1997, the 65% owner of H & G
refinanced H & G's first mortgage such that it allowed for the purchase
of 35% of the building by the Company. Prior to the refinancing, the
Company purchased the above mentioned shares which were held in escrow
as collateral for the Company's note payable to the 65% owner of H & G.
The stock held in escrow was reflected on the balance sheet at December
31, 1996 as a long-term investment since the Company intended to
exchange its shares in H & G for an ownership interest in 35% of the
building. The aggregate purchase price for the shares was $700,000,
with a cash payment of $140,000 and a promissory note of $560,000(see
Note 8).
F-11
<PAGE>
7. LINE OF CREDIT
On May 29, 1997, the Company refinanced its existing revolving line of
credit. The new line of credit of $7,500,000 provides for borrowings
based on a percentage of eligible trade accounts receivable and
inventories. Borrowings pursuant to the agreement bear interest,
payable monthly, at the financial institution's prime rate plus
.25%(8.75% at December 31, 1997) and are due on demand. At December 31,
1997, there was no additional availability under this agreement. This
revolving line of credit is collateralized by substantially all
accounts receivable and inventories of the Company and is guaranteed by
certain stockholders of the Company.
Prior to May 29, 1997, the Company had a revolving line of credit with
a financial institution for $5,000,000 and provided for borrowings
based on a percentage of eligible trade accounts receivable and
inventories. Borrowings pursuant to the agreement bore interest,
payable monthly, at the financial institution's prime rate plus .25%
(8.50% at December 31, 1996) and were due on demand. This revolving
line of credit was collateralized by substantially all accounts
receivable and inventories of the Company and was guaranteed by certain
stockholders of the Company.
F-12
<PAGE>
8. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------- --------
<S> <C> <C>
Mortgage note, payable in monthly
principal payments of $1,890 plus
interest at the financial institutions
prime rate plus .50% (9.00% at December
31, 1997) with a balloon payment of
$449,150 due on March 31, 2002,
collateralized by building and building
improvements (a) $539,878 $ --
Promissory note, issued in connection
with the Company's investment in H & G
described in Note 6, bearing interest at
9.875% at December 31, 1996 payable in
full on January 31, 1997, collateralized
by the Company's investment in H & G (a) -- 546,451
Promissory note -- 7,940
-------- --------
539,878 554,391
Less current maturities (22,682) (26,841)
-------- --------
$517,196 $527,550
======== ========
</TABLE>
(a) On January 31, 1997, the Company entered into a 90-day note payable
with a bank, the proceeds of which were used to pay-off the existing
promissory note. On March 31, 1997, this promissory note was repaid
with the proceeds of the mortgage note.
Maturities on long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 22,682
1999 22,682
2000 22,682
2001 22,682
2002 449,150
--------
$539,878
========
</TABLE>
F-13
<PAGE>
9. RELATED PARTY TRANSACTIONS
On January 1, 1997, in connection with the issuance of shares under an
employment agreement (Note 11) certain stockholders' sold 1,164,741
shares of common stock to the Company at a purchase price of $.15 per
share totaling $174,670. The purchase price of $174,670 was paid
through the reduction of notes receivable and advances to related
parties.
As of December 31, 1997, the Company had notes receivable and advances
to related parties, due on demand, totaling $380,613, of which $187,656
represents advances to certain officers for 1998 compensation. The
Company does not intend to demand repayment prior to January 1, 1999.
10. INCOME TAXES
Concurrent with the March 31, 1996 issuance of additional shares of
common stock to a domestic corporation, the Company's S corporation
election was terminated, making it subject to corporate income taxes.
The components of the income tax provision for the year ended December
31, 1997 and the period April 1, 1996 to December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1,
YEAR ENDED 1996 TO
DECEMBER 3 DECEMBER 31,
1997 1996
---------- -------------
<S> <C> <C>
Current $ -- $34,801
Deferred (15,874) 15,874
-------- -------
Total $(15,874) $50,675
======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
(liabilities) are as follows:
F-14
<PAGE>
10. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED APRIL 1,1996
DECEMBER TO DECEMBER
31, 1997 31, 1996
---------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 49,587 $ --
Allowance for doubtful accounts 51,983 40,512
Amortization---expansion costs -- 27,132
Uniform inventory capitalization 61,332 26,774
--------- ---------
Deferred tax assets 162,902 94,418
Less valuation allowance (137,194) --
--------- ---------
Total deferred tax assets 25,708 94,418
Deferred tax liabilities:
Fixed assets (25,708) (25,708)
Expansion costs -- (84,584)
--------- ---------
Total deferred tax liabilities (25,708) (110,292)
--------- ---------
Total net deferred taxes $ -- $ (15,874)
========= =========
</TABLE>
F-15
<PAGE>
10. INCOME TAXES (CONTINUED)
The reconciliation of the income tax computed at the U.S. federal
statutory rate to income tax expense for the year ended December 31,
1997 and the period April 1, 1996 through December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------ -----
<S> <C> <C>
Tax at federal statutory rate (34.00)% 34.00%
State taxes, net of federal tax benefit (3.32) 4.14
Nondeductible items 2.95 4.78
Benefit of change in tax status -- (7.08)
Benefit of graduated tax rates -- (4.50)
Valuation allowance 30.80 --
------ -----
Total (3.57)% 31.34%
====== =====
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on weight of the evidence , it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. After consideration of all the evidence, both positive and
negative, management has determined that a $137,194 valuation allowance
at December 31, 1997 is necessary to reduce the deferred tax assets to
the amount that will more likely than not be realized. The change in
the valuation allowance for the current year is $137,194. At December
31, 1997, the Company has available net operating loss carryforwards of
approximately $132,000, which expire in the year 2012.
11. COMMITMENTS
OPERATING LEASES
The Company leases vehicles and office equipment under noncancelable
operating leases expiring in various years through 2001. The leases
require the Company to pay maintenance, taxes and insurance. Future
minimum rental commitments under long-term noncancelable operating
leases are as follows:
F-16
<PAGE>
11. COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998 $120,265
1999 94,565
2000 28,198
2001 11,139
--------
$254,167
========
</TABLE>
During the years ended December 31, 1997 and 1996, rent expense was
$110,384 and $70,895 respectively.
AGREEMENTS
Effective December 1, 1995, the Company entered into an exclusive
distributorship agreement with Keepsake, Inc. (Keepsake), a Florida
Corporation, from which the Company obtained a license to utilize the
intellectual property (technology) of Keepsake in the manufacturing and
sale of "The Message Camera." The technology involves the imprint of
graphic pictorial representations upon photographic film for these
single use cameras. On October 22, 1996, the Company amended this
agreement extending the initial term from 5 to 20 years. The agreement
provided for monthly royalty payments based on sales of single-use
cameras. In order to prevent the termination of the Company's rights
under this amended agreement, the Company is required to make certain
minimum annual guaranteed royalty payments. During 1997, the Company
incurred royalty expense to Keepsake of approximately $538,000, of
which $95,667 remains unpaid and is included in trade accounts payable
at December 31, 1997. At December 31, 1997, the remaining guaranteed
royalty commitment was approximately $23.3 million. However, effective
November 1, 1997, the Company discontinued the payments to Keepsake due
to a dispute that arose in connection with the validity of Keepsake's
patents. On February 20,1998, Keepsake terminated the distributorship
agreement and brought a suit against the Company for, among other
things, breach of contract. At December 31,1997, raw material inventory
totaling approximately $434,000 was being held by Keepsake, and,
accordingly, is included in noncurrent other assets. See legal matters
below.
On November 1, 1997 the Company entered into a nonexclusive license
agreement with Polaroid, the owner of certain patents, for the
manufacture and sale of pre-exposed film for use in The Message Camera.
The license agreement with Polariod continues until the patents expire
and may be terminated by the Company at any time by 60 days prior
written notice. In the event the Company is unable to substantially
perform its
F-17
<PAGE>
11. COMMITMENTS (CONTINUED)
obligations under the agreement and such default or inability is not
cured within 60 days after written notice from Polaroid, then Polaroid
may terminate the agreement by giving written notice. The agreement
provides for monthly royalty payments of $.30 for each licensed product
sold or disposed of or 5% of the net selling price of the licensed
product, whichever is greater. During 1997, the Company incurred
royalty expense to Polaroid of approximately $27,000 of which $27,000
is included in trade accounts payable at December 31, 1997.
On January 1, 1997, the Company entered into a five-year employment
agreement with an officer that requires the Company to pay a minimum
compensation of $180,000 per year. At such time as the Company
completes an underwritten public offering, the base salary shall
increase to $250,000 per year. In addition, the Company issued to this
officer 1,164,470 shares of common stock, of which 388,156 vested on
January 1, 1997. The remaining shares vest pro rata on a monthly basis
over the period from February 1, 1997 through January 1, 1999. Deferred
compensation of $63,076 relates to the unvested shares at December 31,
1997 and is being amortized over the vesting period of the related
shares.
On July 1, 1997, the Company entered into a three year employment
agreement with an officer that requires the Company to pay a minimum
compensation of $100,000 per year, plus commissions.
LEGAL MATTERS
The Company is a defendant in an action by Keepsake, alleging, among
other things, breach of contract (failure to make continuing fee
payments, failure to accurately report sales and make payments under
its agreements), civil theft, declaratory judgement, specific
performance and injunctive relief ( failure to obtain written approval
from Keepsake before appointing exclusive sub-distributorships). This
action is at the pleadings stage. No trial date has been set.
Management believes it has a strong defense in this action; however,
given the complexity of the issues involved, it is unable to evaluate
the likelihood of a favorable or unfavorable outcome at this time.
The Company is a plaintiff in an action alleging, among other things,
breach of certain written agreements and misappropriation of trade
secrets. The defendant in that action has filed a lawsuit, in which the
Company is a named defendant, asking the court to declare it is not
infringing on certain patents underlying the technology described above
alleging, among other things, unfair competition. Both parties have
exchanged a release and settlement agreement, but it has not been
executed and the action has not been dismissed. Management intends to
continue to seek a settlement and believes the ultimate outcome will
not have a material adverse effect on the Company's financial condition
or results of operations.
F-18
<PAGE>
The Company is one of 28 defendants in an action by Fuji Film, alleging
violation of a number of its patents. On February 26, 1999 the
Administrative Law Judge ruled in favor of Fuji potentially eliminating
the Company's use of recycled cameras. Although such ruling is not the
final decision of the International Trade Commission, nor is it
binding or enforceable, there can be no assurance the International
Trade Commission will change such ruling. However, the Company has
completed the design and development of a new 35mm camera which
management believes should eliminate any potential conflict or
infringement with any of the Fuji patents. Therefore, even if Fuji
Film prevails, the Company believes that this will not have a material
effect on the Company's business.
12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan, covering
substantially all employees with more than one year of service.
Contributions for the profit sharing plan are discretionary and
determined by the Company's Board of Directors. During the years ended
December 31, 1997 and 1996, no contributions were made to this plan
13. STOCKHOLDERS' EQUITY
On March 11, 1996, the Board of directors authorized a 6.96-for-one
stock split resulting in 5,982,818 additional shares which were
distributed to the shareholders of record.In March 1996, the Company
issued 227,963 shares of unrestricted common stock to a domestic
corporation at approximately $0.17 per share. The issue price was
determined by the Board of Directors to be the market value at the date
of issuance. Additionally, the Company granted the corporation an
option to purchase an additional 227,963 shares of restricted stock at
$0.12 per share, which option was exercised in 1996. The option price
of $0.12 per share was determined by the Board of Directors to be the
market value at the date of grant.
In August 1996, the Company completed a private placement of 316,966
shares of common stock at $3.00 per share for an aggregate offering
price of $950,898. In connection with this private placement, the
Company issued 7,900 shares of common stock for legal services and
recorded $23,700 of expense based on the private placement offering
price of $3.00 per share.
In December 1997, the Company completed a private placement of 48,667
shares of Series A convertible preferred stock with a $.0001 par value,
at $30.00 per share for an aggregate offering price of $1,460,377. The
Series A convertible preferred stock provides for payment of semiannual
cash dividends of 5% per annum ($18,695 for the year ended December 31,
1997). Each share of Series A convertible preferred stock is
convertible at the option of the holder into ten shares of the
Company's common stock, $.0001 par value, equivalent to a price of
$3.00 per share of common stock. The conversion price is subject to
adjustment in the event the average of the Company's earnings per share
for its fiscal years of 1997 and 1998, on a fully diluted basis (the
"Average EPS"), is less than $.20 per share, in which event the
conversion price shall be reduced to a number that equals 15 times the
Average EPS, provided that in no event shall the conversion price be
reduced below $2.50, an equivalent of 12 shares of the Company's common
stock. At any time after one year from the date of issuance, the
F-19
<PAGE>
Company can require that all outstanding shares of the Series A
convertible preferred stock be automatically converted at the
conversion price then in effect if at any time (i) the closing bid
price of the Company's common stock has exceeded $7.50 per share for a
period of 20 consecutive trading days, (ii) the Company's common stock
has been listed on NASDAQ or another national securities exchange and
(iii) a registration statement covering the shares of common stock
issuable upon conversion of the Series A convertible preferred stock
has been filed with the Securities and Exchange Commission and declared
effective. The holders of the Series A convertible preferred stock are
entitled to such number of votes as are equal to the number of shares
into which their holdings are convertible and vote together with the
holders of the Company's common stock. In the event of liquidation,
dissolution or winding up of the Company, the holders are entitled to
share ratably, with all other holders of preferred stock all assets
remaining available for distribution after payment of liabilities, but
before any payments are made to the holders of common stock, up to
$30.00 per share, plus any accrued but unpaid dividends. In connection
with this private placement, the Company issued warrants to purchase
202,77 shares of common stock to the placement agent. The warrants are
exercisable at $3 per share after December 30, 1998 and prior to
December 30, 2002. The conversion price is subject to adjustment in the
event Average EPS is less than $.20 per share, in which event the
conversion price shall be reduced to a number that equals 15 times the
Average EPS, provided that in no event shall the conversion price be
reduced below $2.50.
14. STOCK OPTION PLAN
On March 15, 1996, the Company established the PSI Industries, Inc.
1996 Stock Option Plan (the "Plan"). The Company has elected to follow
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related Interpretations on accounting for its
employee stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, requires the use of option valuation models
that were not developed for use in valuing employee stock options.
Under APB No. 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock at the
date of grant, no compensation expense is recognized.
Pursuant to the Plan, during 1996, the Company granted options to its
employees to purchase 224,000 shares of its common stock at an exercise
price of $0.10 per share and 366,333 at an exercise price of $.11 per
share. From July 1, 1997 through December 31, 1997 the Company granted
options to its employees to purchase 135,000 shares of its
F-20
<PAGE>
14. STOCK OPTION PLAN(CONTINUED)
common stock at an exercise price of $.15 per share and 5,000 shares at
an exercise price of $.25 per share. The exercise prices were
determined by the Board of Directors to be the market value at the date
of grant, and, therefore, no compensation expenses was recognized.
Under the Plan, incentive stock options ("ISOs") may be granted at an
exercise price of not less than the market value at the date of grant,
except for ISOs granted to a 10% or greater stockholder, for which the
exercise price is no less than 110% of the market value at the date of
grant.
During 1997, the Company issued 397,000 shares of restricted common
stock in exchange for services which were valued at $59,551.
During 1997, 672,333 options granted under this plan were exercised of
which 156,000 were exercised for cash and 516,333 were exercised for
stock subscriptions receivable.
Pro forma information regarding net income is required by SFAS No. 123,
and has been determined as if the Company had accounted for its
employees stock options under the fair value method of that statement.
The fair value of outstanding options was estimated at the date of
grant using the minimum value method, using the following assumptions:
risk free rate of 5.11% for 1997, no expected dividends and weighted
average expected life of the options of 2.7 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Based
on the assumptions utilized above, the pro forma impact on net loss for
1997 is not materially different from amounts reported.
F-21
<PAGE>
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1997 1996
---------- ----------
<S> <C> <C>
Numerator:
Net (loss) income $ (429,509) $ 149,463
Dividend on Series A preferred stock (18,965) --
---------- ----------
Numerator for basic and diluted
earnings (loss) per share-income
available to common stockholders $ (448,474) $ 149,463
---------- ----------
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares
outstanding 7,392,619 7,326,853
Effect of dilutive securities
Options -- 454,497
---------- ----------
Denominator for diluted earnings (loss)
per share-adjusted weighted average and
assumed conversions 7,392,619 7,781,350
========== ==========
Basic earnings (loss) per share $ (0.06) $ 0.02
========== ==========
Diluted earnings (loss) per share $ (0.06) $ 0.02
========== ==========
</TABLE>
F-22
<PAGE>
16. BANK CREDIT
On September 15, 1998, the Company entered into a new credit agreement
with a bank, which replaces the existing line of credit. The new
agreement of $12,000,000 provides for borrowings based on a percentage
of eligible trade accounts receivable and inventories. Several options
are available to borrow at floating interest rates based on LIBOR
(London Interbank Offered Rate) plus 2.25% or, at the financial
institution's prime rate. The loan is due on demand. The credit
agreement is collateralized by substantially all assets of the Company.
The credit agreement contains covenants that place certain limits on
the Company's ability to merge with another entity, incur debt or
create liens on assets. In addition the credit agreement requires the
Company to meet a tangible net worth test.
17. YEAR 2000 ISSUE AND SUBSEQUENT EVENTS (UNAUDITED)
A. Until recently, many computer programs were written using two digits
rather than four digits to define the applicable year in the twentieth
century. Such software may recognize a date using "00" as the year 1900
rather than the year 2000. Utilizing both internal and external
resources, the Company is in the process of defining, assessing and
converting or replacing various programs, hardware and instrumentation
systems to make them Year 2000 compatible. The Company's Year 2000
project is comprised of two components-business applications and
equipment. The business applications component consists of the
Company's business computer systems, as well as the computer systems of
third-party suppliers or customers, whose Year 2000 problems could
potentially impact the Company. Equipment exposures consist of personal
computers, system servers, and telephone equipment whose Year 2000
problems could also impact the Company. Management believes that the
cost of its Year 2000 initiatives is not expected to be material to the
Company's results of operations or financial position.
B. Through November 11, 1998, the Company sold 1,037,500 shares of
commons stock for $1,000,000 under a 504 private placement memorandum.
F-23
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Note on Forward-Looking Statements.........................................
Available Information......................................................
Prospectus Summary.........................................................
Risk Factors...............................................................
Use of Proceeds............................................................
Capitalization.............................................................
Price Range of Common Stock and Dividend Policy............................
Management's Discussion and
Analysis of Financial Condition and
Plan of Operations.......................................................
Business...................................................................
Management.................................................................
Certain Transactions.......................................................
Principal Stockholders.....................................................
Description of Securities..................................................
Underwriting...............................................................
Legal Matters..............................................................
Experts....................................................................
Index to Financial Statements..............................................
</TABLE>
Until _________, 1999 (90 days after the date of the Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This in addition to the obligation of dealers to deliver the Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
800,000 UNITS
PSI INDUSTRIES, INC.
PROSPECTUS
FAS WEALTH MANAGEMENT
SERVICES, INC.
________________, 1999
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act (the "Florida Act") contains
provisions entitling the Company's directors and officers to indemnification
from judgments, settlements, penalties, fines, and reasonable expenses
(including attorney's fees) as the result of an action or proceeding in which
they may be involved by reason of having been a director or officer of the
Company. In its Articles of Incorporation, the Company has included a provision
that limits, to the fullest extent now or hereafter permitted by the Florida
Act, the personal liability of its directors to the Company or its shareholders
for monetary damages arising from a breach of their fiduciary duties as
directors. Under the Florida Act as currently in effect, this provision limits a
director's liability except where such director breaches a duty. The Company's
Articles of Incorporation and By-Laws provide that the Company shall indemnify
its directors and officers to the fullest extent permitted by the Florida Act.
The Florida Act provides that no director or officer of the Company shall be
personally liable to the Company or its shareholders for damages for breach of
any duty owed to the Company or its shareholders, except for liability for (i)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (ii) any unlawful payment of a dividend or unlawful
stock repurchase or redemption in violation of the Florida Act, (iii) any
transaction from which the director received an improper personal benefit or
(iv) a violation of a criminal law. This provision does not prevent the Company
or its shareholders from seeking equitable remedies, such as injunctive relief
or rescission. If equitable remedies are found not to be available to
shareholders in any particular case, shareholders may not have any effective
remedy against actions taken by directors or officers that constitute negligence
or gross negligence.
The Company's ByLaws also include the following provisions:
(1) The 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 is or was a director, officer,
employee, or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against liability
incurred in connection with such proceeding, including any appeal thereof, if he
acted in good faith and in a manner he 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 conduct
was unlawful. The termination of any proceeding by judgment, order, settlement,
or conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in, or not opposed to, the best
interests of the corporation or, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(2) The corporation shall have power to indemnify any person, who was
or is a party to any proceeding by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses and amounts paid in settlement
II-1
<PAGE>
not exceeding, in the judgment of the board of directors, the estimated expense
of litigating the proceeding to conclusion, actually and reasonably incurred in
connection with the defense or settlement of such proceeding, including any
appeal thereof. Such indemnification shall be authorized if such person acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that no indemnification shall be
made under this subsection in respect of any claim, issue, or matter as to which
such person shall have been adjudged to be liable unless, and only to the extent
that, the court in which such proceeding was brought, or any other court of
competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
(3) To the extent that a director, officer, employee, or agent of the
corporation has been successful on the merits or otherwise in defense of any
proceeding referred to in subsections (1) or (2), or in defense of any claim,
issue, or matter therein, he shall be indemnified against expenses actually and
reasonably incurred by him in connection therewith.
(4) Any indemnification under subsections (1) or (2), unless pursuant
to a determination by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in subsections (1) or (2).
Such determination shall be made:
(a) By the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such proceeding;
(b) If such a quorum is not obtainable or, even if obtainable, by
majority vote of a committee duly designated by the board of directors (in which
directors who are parties may participate) consisting solely of two or more
directors not at the time parties to the proceeding;
(c) By independent legal counsel:
(i) Selected by the board of directors prescribed in paragraph
(a) or the committee prescribed in paragraph (b); or
(ii) If a quorum of the directors cannot be obtained for
paragraph (a) and the committee cannot be designed under paragraph (b), selected
by majority vote of the full board of directors (in which directors who are
parties may participate); or
(d) By the shareholders by a majority vote of a quorum consisting
of shareholders who were not parties to such proceeding or, if no such quorum is
obtainable, by a majority vote of shareholders who were not parties to such
proceeding.
(5) Evaluation of the reasonableness of expenses and authorization of
indemnification shall be made in the same manner as the determination that
indemnification is permissible. However, if the determination of permissibility
is made by independent legal counsel, persons specified by paragraph (4)(c)
shall evaluate the reasonableness of expenses and may authorize indemnification.
II-2
<PAGE>
(6) Expenses incurred by an officer or director in defending a civil or
criminal proceeding may be paid by the corporation in advance of the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if he is ultimately found not to
be entitled to indemnification by the corporation pursuant to this section.
Expenses incurred by other employees and agents may be paid in advance upon such
terms or conditions that the board of directors deems appropriate.
(7) The indemnification and advancement of expenses provided pursuant
to this section are not exclusive, and the corporation may make any other or
further indemnification or advancement of expenses of any of its directors,
officers, employees, or agents, under any bylaw, agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
However, indemnification or advancement of expenses shall not be made to or on
behalf of any director, officer, employee, or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute:
(a) A violation of the criminal law, unless the director, officer,
employee, or agent had reasonable cause to believe his conduct was lawful or had
no reasonable cause to believe his conduct was unlawful;
(b) A transaction from which the director, officer, employee, or
agent derived an improper personal benefit;
(c) In the case of a director, a circumstance under which the
liability provisions of Section 607.0834 under the Act are applicable; or
(d) Willful misconduct or a conscious disregard for the best
interests of the corporation in a proceeding by or in the right of the
corporation to procure a judgment in its favor or in a proceeding by or in the
right of a shareholder.
(8) Indemnification and advancement of expenses as provided in this
section shall continue as, unless otherwise provided when authorized or
ratified, to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of such a person, unless otherwise provided when authorized or ratified.
(9) Notwithstanding the failure of the corporation to provide
indemnification, and despite any contrary determination of the board or of the
shareholders in the specific case, a director, officer, employee, or agent of
the corporation who is or was a party to a proceeding may apply for
indemnification or advancement of expenses, or both, to the court conducting the
proceeding, to the circuit court, or to another court of competent jurisdiction.
On receipt of an application, the court, after giving any notice that it
considers necessary, may order indemnification and advancement of expenses,
including expenses incurred in seeking court-ordered indemnification or
advancement of expenses, if it determines that:
(a) The director, officer, employee, or agent if entitled to
mandatory indemnification under subsection (3), in which case the court shall
also order the corporation to pay the director reasonable expenses incurred in
obtaining court-ordered indemnification or advancement of expenses;
II-3
<PAGE>
(b) The director, officer, employee, or agent is entitled to
indemnification or advancement of expenses, or both, by virtue of the exercise
by the corporation of its power pursuant to subsection (7); or
(c) The director, officer, employee, or agent is fairly and
reasonably entitled to indemnification or advancement of expenses, or both, in
view of all the relevant circumstances, regardless of whether such person met
the standard of conduct set forth in subsection (1), subsection (2) or
subsection (7).
(10) For purposes of this section, the term "corporation" includes, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger, so that
any person who is or was a director, officer, employee, or agent of a
constituent corporation, or is or was serving at the request of a constituent
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, is in the same position
under this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(11) For purposes of this section:
(a) The term "other enterprises" includes employee benefit plans;
(b) The term "expenses" includes counsel fees, including those for
appeal;
(c) The term "liability" includes obligations to pay a judgment,
settlement, penalty, fine (including an excise tax assessed with respect to any
employee benefit plan), and expenses actually and reasonably incurred with
respect to a proceeding;
(d) The term "proceeding" includes any threatened, pending, or
completed action, suit or other type of proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal;
(e) The term "agent" includes a volunteer;
(f) The term "serving at the request of the corporation" includes
any service as a director, officer, employee, or agent of the corporation that
imposes duties on such persons, including duties relating to an employee benefit
plan and its participants or beneficiaries; and
(g) The term "not opposed to the best interest of the corporation"
describes the actions of a person who acts in good faith and in a manner he
reasonably believes to be in the best interests of the participants and
beneficiaries of an employee benefit plan.
(12) The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the
II-4
<PAGE>
corporation would have the power to indemnify him against such liability under
the provisions of this section.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Representative's non-accountable
expense allowance and advisory fee) are as follows:
<TABLE>
<S> <C>
SEC Registration and Filing Fee.......................................$ 2,252
Legal Fees and Expenses*.............................................. 125,000
Accounting Fees and Expenses*......................................... 100,000
Financial Printing*................................................... 75,000
Transfer Agent Fees*.................................................. 7,500
Blue Sky Fees and Expenses*........................................... 50,000
Miscellaneous*........................................................ 40,248
--------
TOTAL.......................................................$400,000
========
</TABLE>
- ----------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On March 1, 1996, the Company undertook a 6.9641 forward stock split
of its Common Stock. All figures set forth below give effect to the forward
split.
In March 1996, the Company sold to a consultant 227,963 shares of its
Common Stock in exchange for a promissory note in the amount of $37,841.86. The
shares were issued to the consultant in September of 1996 and the promissory
note was paid in full in February 1997. The shares were issued pursuant to Rule
504 of Regulation D of the Securities Act of 1933, as amended (the "Act"). In
addition in March 1996, the Company also agreed to issue an additional 227,963
shares of its Common Stock to the consultant for consulting services to be
rendered. The shares were issued to the consultant in September 1996. The
issuance of the shares was exempt from the registration requirements of the Act
pursuant to Section 4(2) of the Act.
In March 1996, the Company agreed to issue to a consulting firm an
aggregate of 341,944 shares of its Common Stock for consulting services to be
rendered. The shares were issued to the president of the consulting firm in
September 1996. In connection with a dispute with the consultant over its right
to receive the shares, the shares, which had not been delivered, were cancelled
in October 1996. In December 1997, in connection with settlement of the dispute
with the consultant, the Company issued 335,000 shares to the consultant, of
which 285,000 have been delivered and 50,000 shares were cancelled in May of
1998. The issuance of the shares and subsequent reissuance was exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
In September 1996, the Company completed an offering of Common Stock
pursuant to Rule 504 of Regulation D under the Act. An aggregate of 316,966
shares of Common Stock for an aggregate of $950,898 were sold by the Company to
43 investors.
II-5
<PAGE>
In September 1996, the Company issued 7,900 shares of its Common Stock
to a law firm for legal services rendered. The issuance of the shares was exempt
from the registration requirements of the Act pursuant to Section 4(2) of the
Act.
In April 1997, the Company issued 90,000 shares of its Common Stock to
four employees in connection with the exercise of stock options. The Company
received exercise proceeds of $9,000. The issuance of the shares was exempt from
the registration requirements of the Act pursuant to either Section 4(2) of the
Act or Rule 701 under the Act.
In June 1997, the Company issued 40,000 shares of its Common Stock to
two attorneys for legal services rendered. The issuance of the shares was exempt
from the registration requirements of the Act pursuant to Section 4(2) of the
Act.
In July 1997, the Company issued 15,000 shares of its Common Stock to
a consultant in consideration for consulting services rendered. The issuance of
the shares was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
In August 1997, the Company issued an aggregate of 30,000 shares to
two employees for a purchase price of $.10 per share in connection with exercise
of stock options. The issuance of the shares was exempt from the registration
requirements of the Act pursuant to either Section 4(2) of the Act or Rule 701
under the Act.
In August 1997, the Company issued 1,164,470 shares of its Common
Stock to its President, Benjamin Cohen. The shares were issued pursuant to the
terms of an employment agreement entered into with Mr. Cohen on January 1, 1997.
The issuance of the shares was exempt from the registration requirements of the
Act pursuant to Section 4(2) of the Act.
In October 1997, the Company issued 183,167 shares of its Common Stock
to Dominick M. Seminara, the Chief Executive Officer of the Company, 183,167
shares of its Common Stock to Mirco Vietti, its Executive Vice President, and
30,000 shares of its Common Stock to a former officer, in connection with the
exercise of stock options. Messrs. Seminara and Vietti paid $.11 per share and
the former officer paid $.10 per share in connection with the exercise by
delivery of promissory notes. The issuance of the shares was exempt from the
registration requirements of the Act pursuant to either Section 4(2) of the Act
or Rule 701 under the Act.
In December 1997, the Company issued 15,000 shares of its Common Stock
to George Erfurt, its Vice President of Sales, in the connection with the
exercise of his stock options. The Company received $.15 per share from Mr.
Erfurt. The issuance of the shares was exempt from the registration requirements
of the Act pursuant to either Section 4(2) of the Act or Rule 701 under the Act.
In December 1997, the Company issued 5,000 shares to an accountant in
return for professional services rendered which were not related to the auditing
of the Company's financial statements. The issuance of the shares was exempt
from the registration requirements of the Act pursuant to Section 4(2) of the
Act.
In December 1997, the Company completed a private offering of 48,667
shares of Series A Convertible Preferred Stock. The offering was conducted
pursuant to Rule 506 of Regulation D of the
II-6
<PAGE>
Act. In connection with the offering, the firm of Noesis Capital Corp. served as
the placement agent. As compensation for its services as placement agent, Noesis
received a selling commission of 5% of the dollar amount of the offering. In
addition, Noesis received warrants to purchase shares of the Company's Common
Stock exercisable at $2.50 per share.
In the period from September 1997 through May 1998, the Company issued
176,800 shares of its Common Stock to 11 employees and 1 former employee in
connection with their exercise of stock options at per share prices ranging from
$.10 to $.25. The issuance of the shares was exempt from the registration
requirements of the Act pursuant to either Section 4(2) of the Act or Rule 701
under the Act.
In July 1998, the Company issued 15,022 shares of its Series B
Convertible Preferred Stock to a manufacturer of its products in satisfaction of
an obligation to pay the manufacturer the sum of $1,502,200. The issuance of the
shares was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
In September 1998, the Company issued 62,500 shares of its Common
Stock to two investors for gross proceeds of $125,000 in connection with an
offering pursuant to Rule 504 of Regulation D of the Act. The firm of Alexander
Wescott acted as placement agent in connection with the Offering and received
commissions and non-accountable expense allowance of an aggregate of 13% of the
proceeds raised.
In September 1998, the Company issued 7,500 shares to a public
relations firm, for services to be rendered. The issuance of the shares was
exempt from the registration requirements of the Act pursuant to Section 4(2) of
the Act.
In September 1998, the Company issued an aggregate of 15,000 shares to
two accountants in return for professional services rendered which were not
related to the auditing of the Company's financial statements. The issuance of
the shares was exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
In October 1998, the Company issued 100,000 shares to an investment
banking firm for services to be rendered pursuant to a financial advisory
agreement. The issuance of the shares was exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
In November 1998, the Company issued an aggregate of 975,000 shares of
its Common Stock to six investors for aggregate proceeds of $875,000. The shares
were issued pursuant to Rule 504 of Regulation D of the Act.
Reference is also made hereby to "Principal Stockholders," "Certain
Transactions" and "Description of Securities" in the Prospectus for more
information with respect to the previous issuance and sale of the Company's
securities.
II-7
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement*
2 Articles of Merger[2](1)
3.1 Form of Amended and Restated Articles of Incorporation*
3.2 By-Laws, as amended[3.6](1)
4.1 Designation of Series C Convertible Preferred Stock*
4.2 Form of Warrant Certificate[4.2](1)
4.3 Form of Series A Preferred Stock Certificate[4.3](1)
4.4 Form of Series B Preferred Stock Certificate[4.4](1)
4.5 Form of Series C Preferred Stock Certificate(2)
4.6 Form of Series II Common Stock Purchase Warrant Agreement
between the Company and Florida Atlantic Stock Transfer, Inc.(2)
4.7 Form of Underwriters' Purchase Option*
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A.(2)
10.1 1996 Stock Option Plan, as amended(2)
10.2 License Agreement between Registrant and Polaroid Corp. dated
November 1, 1997[10.2](1)
10.3 Employment Agreement for Benjamin Cohen dated January 1,
1997[10.3](1)
10.4 Employment Agreement for George Erfurt dated July 1, 1997[10.4](1)
10.5 Photoline Standardized Profit Sharing Plan & Trust[10.5](1)
10.6 Loan and Security Agreement between Registrant and LaSalle National
Bank dated September 15, 1998[10.6](1)
10.7 Promissory Note of Registrant and Mortgage Deed between Registrant
and Mellon United National Bank dated December 16, 1998[10.7](1)
21 List of Subsidiaries of the Company*
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C.*
23.2 Consent of Atlas, Pearlman, Trop & Borkson, P.A. (contained in such
firm's opinion filed as Exhibit 5.1)(2)
27.1 Financial Data Schedule*
</TABLE>
- ----------
* Filed herewith
(1) Incorporated by reference to the exhibit number indicated as filed with
the Company's Registration Statement on Form 10-SB (File No. 001-14747)
as filed with the Commission on December 30, 1998
(2) To be filed by Amendment
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to participating
broker-dealers, at the closing, certificates in such denominations and
registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
II-8
<PAGE>
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant also undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as a part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h)
II-9
<PAGE>
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Boca Raton, Florida, on March 9, 1999.
PSI INDUSTRIES, INC.
BY: /s/ DOMINICK M. SEMINARA
-----------------------------------
Dominick M. Seminara
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Form
SB-2 registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ DOMINICK M. SEMINARA Chairman and Chief Executive March 9, 1999
- ----------------------------------- Officer and Director
Dominick M. Seminara (Principal Executive Officer)
/S/ BENJAMIN COHEN President, Chief Operations March 9, 1999
- ----------------------------------- Officer and Director (Principal
Benjamin Cohen Financial & Accounting Officer)
/S/ MIRCO VIETTI Director March 9, 1999
- -----------------------------------
Mirco Vietti
/S/ MARTIN D. EPSTEIN Director March 9, 1999
- -----------------------------------
Martin D. Epstein
/S/ LISA A. DAVIDSON Director March 9, 1999
- -----------------------------------
Lisa A. Davidson
/S/NICO B.M. LETSCHERT Director March 9, 1999
- -----------------------------------
Nico B.M. Letschert
/S/CORNELIS F. WIT Director March 9, 1999
- -----------------------------------
Cornelis F. Wit
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Articles of
Incorporation
4.1 Designation of Series C Convertible Preferred Stock
4.7 Form of Underwriters' Purchase Option
21 List of Subsidiaries of the Company
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C.
27.1 Financial Data Schedule
EXHIBIT 1.1
800,000 UNITS, EACH UNIT CONSISTING OF
ONE (1) SHARE OF SERIES C CONVERTIBLE PREFERRED STOCK,
PAR VALUE $.0001 PER SHARE
AND
ONE (1) SERIES II REDEEMABLE COMMON STOCK PURCHASE WARRANT
PSI INDUSTRIES, INC.
UNDERWRITING AGREEMENT
----------------------
HOUSTON, TEXAS
FEBRUARY ___, 1999
FAS Wealth Management Services, Inc.
16935 West Bernardo Drive, Suite 107
San Diego, California 92127
PSI Industries, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell to you (the "Underwriter"), an aggregate of 800,000 Units,
each consisting of one share of Series C Convertible Preferred Stock, par value
$.0001 per share ("Preferred Stock") and one Series II Redeemable Common Stock
Purchase Warrant ("Warrant"). The Units may be referred to hereinafter as the
"Securities." Each Warrant entitles the registered holder thereof to purchase
one (1) share of Common Stock, par value $.0001 per share ("Common Stock") at an
exercise price of $__________ (115% of the closing market price per share of the
Common Stock on the day immediately preceding the proposed offering of the
Preferred Stock) for a period of four years, commencing ______________ 2000,
[one year from the effective date of the public offering ("Effective Date"),]
through ______________, 2004 (four years from the Effective Date). The Warrants
are subject to redemption by the Company at any time commencing ______________,
2000 (twelve months from the Effective Date) at $.05 per warrant, if the closing
bid price per share of Common Stock has equaled or exceeded $____________ (170%
of the closing bid price of the Common Stock on the Effective Date) for any 20
consecutive trading days ending within ten days of the written notice of
redemption. In addition, the Company proposes to grant to the Underwriter the
option referred to in Section 2(b) to purchase all or any part of an aggregate
of 120,000 additional Units.
You have advised the Company that you desire to purchase the
Securities. The Company confirms the agreements made by it with respect to the
purchase of the Securities by the Underwriter as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to, and agree with you that:
(a) A registration statement (File No. _____) on Form
SB-2 relating to the public offering of the Securities,
including a form of prospectus subject to completion, copies
of which have heretofore been delivered to you, has been
prepared in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will
file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by
the Commission to be effective under the Act, a prospectus in
the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have
been filed in such registration statement), with such changes
or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and as have been
provided to and approved by you prior to the execution of this
Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to
be effective under the Act, an amendment to such registration
statement, including a form of such prospectus, a copy of
which amendment has been furnished to and approved by you
prior to the execution of this Agreement. As used in this
Agreement, the term "Company" means PSI Industries, Inc.
and/or each of its subsidiaries (its "Subsidiaries"); the term
"Registration Statement" means such registration
1
<PAGE>
statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits
thereto and including any information omitted therefrom
pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed
with such registration statement or any amendment thereto
(including the prospectus subject to completion, if any,
included in the Registration Statement or any amendment
thereto at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Act, or, if no
prospectus is required to be filed pursuant to said Rule
424(b), such term means the prospectus included in the
Registration Statement; except that if such registration
statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration
statement and prior to the Option Closing Date (as hereinafter
defined), the terms "Registration Statement" and "Prospectus"
shall include such registration statement and prospectus as so
amended, and the term "Prospectus" shall include the
prospectus as so supplemented, or both, as the case may be.
(b) Neither the Commission nor the "blue-sky" or
securities authority of any jurisdiction has issued any order
preventing or suspending the use of any Preliminary
Prospectus. At the time the Registration Statement becomes
effective and at all times subsequent thereto up to and on the
First Closing Date (as hereinafter defined) or the Option
Closing Date, as the case may be, (i) the Registration
Statement and Prospectus will in all respects conform to the
requirements of the Act and the Rules and Regulations; and
(ii) neither the Registration Statement nor the Prospectus
will include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary to make statements therein not misleading; provided,
however, that the Company makes no representations, warranties
or agreements as to information contained in or omitted from
the Registration Statement or Prospectus in reliance upon, and
in conformity with, written information furnished to the
Company by or on behalf of the Underwriter specifically for
use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to
stabilization, under the heading "Underwriting," and the
identity of counsel to the Underwriter under the heading
"Legal Matters" constitute for purposes of this Section and
Section 6(b) the only information furnished in writing by or
on behalf of the Underwriter for inclusion in the Registration
Statement and Prospectus, as the case may be.
(c) The Company and its Subsidiaries have been duly
incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation with full corporate power and authority to own
their properties and conduct their business as described in
the Prospectus and are duly qualified or licensed to do
business as foreign corporations and are in good standing in
each other jurisdiction in which the nature of their business
or the character or location of their properties require such
qualification, except where the failure to so qualify will not
materially adversely affect the Company's or Subsidiaries'
business, properties or financial condition.
(d) The authorized, issued and outstanding capital
stock of the Company and its Subsidiaries, including the
predecessors of the Company, is as set forth in the Company's
financial statements contained in the Registration Statement;
the shares of issued and outstanding capital stock of the
Company and its Subsidiaries set forth therein have been duly
authorized, validly issued and are fully paid and
nonassessable; except as set forth in the Prospectus, no
options, warrants, or other rights to purchase, agreements or
other obligations to issue, or agreements or other rights to
convert any obligation into, any shares of capital stock of
the Company or its Subsidiaries have been granted or entered
into by the Company or its Subsidiaries; and the capital stock
conforms to all statements relating thereto contained in the
Registration Statement and Prospectus.
(e) The shares of Preferred Stock underlying the
Units, when paid for, issued and delivered pursuant to this
Agreement, will have been duly authorized, issued and
delivered and will constitute valid and legally binding
obligations of the Company enforceable in accordance with
their terms, except as enforceability may be limited by
bankruptcy, insolvency or other laws affecting the right of
creditors generally or by general equitable principles, and
entitled to the rights and preferences provided by the
Certificate of Incorporation, which will be in the form filed
as an exhibit
2
<PAGE>
to the Registration Statement. The terms of the Preferred
Stock conform to the description thereof in the Registration
Statement and Prospectus.
The Warrants, when paid for, issued and delivered
pursuant to this Agreement, will have been duly authorized,
issued and delivered and will constitute valid and legally
binding obligations of the Company enforceable in accordance
with their terms, except as enforceability may be limited by
bankruptcy, insolvency or other laws affecting the right of
creditors generally or by general equitable principles, and
entitled to the benefits provided by the warrant agreement
pursuant to which such Warrants are to be issued (the "Warrant
Agreement"), which will be substantially in the form filed as
an exhibit to the Registration Statement. The shares of Common
Stock issuable upon exercise of the Warrants have been
reserved for issuance upon the exercise of the Warrants and
when issued in accordance with the terms of the Warrants and
Warrant Agreement, will be duly and validly authorized validly
issued, fully paid and non-assessable and free of preemptive
rights. The Warrant Agreement has been duly authorized and,
when executed and delivered pursuant to this Agreement,
assuming due authorization, execution and delivery by the
transfer agent, will have been duly executed and delivered and
will constitute the valid and legally binding obligation of
the Company enforceable in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency or
other laws affecting the rights of creditors generally or by
general equitable principles. The Warrants and Warrant
Agreement conform to the respective descriptions thereof in
the Registration Statement and Prospectus.
The Underwriter's Purchase Option (as defined in the
Prospectus), when paid for, issued and delivered pursuant to
this Agreement will constitute valid and legally binding
obligations of the Company enforceable in accordance with its
terms except as enforceability may be limited by bankruptcy,
insolvency or other laws affecting the rights of creditors
generally or by general equitable principles. The Securities
issuable upon exercise of the Purchase Option (and the shares
of Common Stock issuable upon exercise of the Warrants) when
issued and paid for in accordance with this Agreement, the
Purchase Option and the Warrant Agreement, will be duly
authorized, validly issued, fully paid and non-assessable and
free of preemptive rights
(f) This Agreement has been duly and validly
authorized, executed and delivered by the Company. The Company
has full power and authority to authorize, issue and sell the
Securities to be sold by it hereunder on the terms and
conditions set forth herein, and no consent, approval,
authorization or other order of any governmental authority is
required in connection with such authorization, execution and
delivery or in connection with the authorization, issuance and
sale of the Securities or the Purchase Option, except such as
may be required under the Act or state securities laws.
(g) Except as described in the Prospectus, or which
would not have a material adverse effect on the condition
(financial or otherwise), business prospects, net worth or
properties of the Company and the Subsidiaries taken as a
whole (a "Material Adverse Effect"), the Company and its
Subsidiaries are not in violation, breach or default of or
under, and consummation of the transactions herein
contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute
a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the property or
assets of the Company or its Subsidiaries pursuant to the
terms of any material indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the
Company or its Subsidiaries is a party or by which the Company
or its Subsidiaries may be bound or to which any of the
property or assets of the Company or its Subsidiaries is
subject, nor will such action result in any violation of the
provisions of the certificate of incorporation or the by-laws
of the Company or its Subsidiaries, as amended, or any statute
or any order, rule or regulation applicable to the Company or
its Subsidiaries of any court or of any regulatory authority
or other governmental body having jurisdiction over the
Company or its Subsidiaries.
(h) Subject to the qualifications stated in the
Prospectus, the Company and its Subsidiaries have good and
marketable title to all properties and assets described in the
Prospectus as owned by them, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not
materially significant or important in relation to their
business or are otherwise disclosed in the Prospectus and the
financial statements set forth in the Prospectus (the
"Financial Statements");
3
<PAGE>
all of the material leases and subleases under which the
Company or its Subsidiaries is the lessor or sublessor of
properties or assets or under which the Company and its
Subsidiaries holds properties or assets as lessee or sublessee
as described in the Prospectus are in full force and effect,
and, except as described in the Prospectus, the Company and
its Subsidiaries are not in default in any material respect
with respect to any of the terms or provisions of any of such
leases or subleases, and, to the best knowledge of the
Company, no claim has been asserted by anyone adverse to
rights of the Company or its Subsidiaries as lessor,
sublessor, lessee or sublessee under any of the leases or
subleases mentioned above, or affecting or questioning the
right of the Company or its Subsidiaries to continued
possession of the leased or subleased premises or assets under
any such lease or sublease except as described or referred to
in the Prospectus; and the Company and its Subsidiaries own or
lease all such properties described in the Prospectus as are
necessary to their operations as now conducted and, except as
otherwise stated in the Prospectus, as proposed to be
conducted as set forth in the Prospectus.
(i) Feldman, Sherb, Ehrlick & Co., P.C., which has
given its report on certain of the Financial Statements, is
with respect to the Company, independent public accountants as
required by the Act and the Rules and Regulations.
(j) The Financial Statements, and schedules together
with related notes present fairly the financial position and
results of operations and changes in cash flow position of the
Company and its Subsidiaries on the basis stated in the
Registration Statement, at the respective dates and for the
respective periods to which they apply. Said statements and
schedules and related notes have been prepared in accordance
with generally accepted accounting principles applied on a
basis which is consistent during the periods involved except
as otherwise disclosed in the Prospectus and Registration
Statement.
(k) Subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus and except as otherwise disclosed or contemplated
therein, the Company and its Subsidiaries have not incurred
any liabilities or obligations, direct or contingent, not in
the ordinary course of business, or entered into any
transaction not in the ordinary course of business, which
would have a Material Adverse Effect, and there has not been
any change in the capital stock of, or any incurrence of
short-term or long-term debt by, the Company or its
Subsidiaries or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or its
Subsidiaries or any material adverse change or any development
involving, so far as the Company or its Subsidiaries can now
reasonably foresee a prospective adverse change in the
condition (financial or otherwise), net worth, results of
operations, business, key personnel or properties of it which
would have a Material Adverse Effect.
(l) Except as set forth in the Prospectus, there is
not now pending or, to the knowledge of the Company,
threatened, any action, suit or proceeding to which the
Company or its Subsidiaries is a party before or by any court
or governmental agency or body, which might result in any
material adverse change in the financial condition, business
prospects, net worth, or properties of the Company or its
Subsidiaries, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination
on the basis of age, sex, religion or race; and no labor
disputes involving the employees of the Company or its
Subsidiaries exist or to the knowledge of the Company, are
threatened which might be expected to have a Material Adverse
Effect except as otherwise disclosed in the Prospectus and the
Financial Statements.
(m) Except as disclosed in the Prospectus, the
Company and its Subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns required to
be filed as of the date hereof and have paid all taxes shown
as due thereon; and there is no tax deficiency which has been,
or to the knowledge of the party, may be asserted against the
Company or its Subsidiaries.
(n) Except as disclosed in the Prospectus, the
Company and its Subsidiaries have sufficient licenses, permits
and other governmental authorizations currently necessary for
the conduct of their business or the ownership of their
properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses
adequate rights to use all material patents, patent
applications, trademarks, service marks, trade-names,
trademark registrations, service mark registrations,
copyrights and licenses necessary for the conduct of such
businesses and have not
4
<PAGE>
received any notice of conflict with the asserted rights of
others in respect thereof. To the best knowledge of the
Company, none of the activities or business of the Company and
its Subsidiaries are in violation of, or cause the Company or
its Subsidiaries to violate, any law, rule, regulation or
order of the United States, any state, county or locality, or
of any agency or body of the United States or of any state,
county or locality, the violation of which would have a
Material Adverse Effect.
(o) The Company and its Subsidiaries have not,
directly or indirectly, at any time (i) made any contributions
to any candidate for political office, or failed to disclose
fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar
public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. The
Company's and Subsidiaries' internal accounting controls and
procedures are sufficient to cause the Company and its
Subsidiaries to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all
transfer or other taxes, (including franchise, capital stock
or other tax, other than income taxes, imposed by any
jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Securities to the
Underwriter hereunder will have been fully paid or provided
for by the Company and all laws imposing such taxes will have
been complied with in all material respects.
(q) All contracts and other documents of the Company
which are, under the Rules and Regulations, required to be
filed as exhibits to the Registration Statement have been so
filed.
(r) Except as disclosed in the Registration
Statement, the Company has no Subsidiaries.
(s) Except as disclosed in the Registration
Statement, the Company has not entered into any agreement
pursuant to which any person is entitled either directly or
indirectly to compensation from the Company for services as a
finder in connection with the proposed public offering.
(t) Except as previously disclosed in writing by the
Company to the Underwriter or as disclosed in the Registration
Statement, no officer, director or stockholder of the Company
has any National Association of Securities Dealers, Inc. (the
"NASD") affiliation.
(u) Except as previously disclosed in writing by the
Company to the Underwriter or as disclosed in the Prospectus,
no other firm, corporation or person has any rights to
underwrite an offering of any of the Company's securities.
2. PURCHASE, DELIVERY AND SALE OF THE SECURITIES AND THE OVER-ALLOTMENT OPTION
SECURITIES.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements
herein contained, (i) the Company agrees to issue and sell to the
Underwriter and the Underwriter agrees to buy from the Company at $6.00
per Unit, at the place and time hereinafter specified, 800,000 Units.
$5.75 of the price per Unit is attributed to the Preferred Stock and
the remaining $.25 of the price per Unit is attributed to the Warrants
(collectively the "First Securities").
Delivery of the First Securities registered in such names and
in such denominations as the Underwriter may reasonably request against
payment therefor shall take place at the offices of Sonfield &
Sonfield, 770 South Post Oak Lane, Suite 435, Houston, Texas 77056 (or
at such other place as may be designated by agreement between the
Underwriter and the Company) at 10:00 a.m., Houston time, on
____________, 1999, such time and date of payment and delivery for the
First Securities being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and
agreements herein contained, the Company hereby grants an option to the
Underwriter (the "Over-Allotment Option") to purchase all or any part
of an aggregate of (i) an additional 120,000 Units from the Company to
cover over allotments at the same price per Unit (with respect to
Securities being sold by the Company) and the same price per share of
Preferred Stock and Warrants as the Underwriter shall pay the Company
for the First Securities being sold pursuant to the provisions of
subsection (a) of this Section 2 (such additional Securities being
referred to herein as the "Over-Allotment Option
5
<PAGE>
Securities"). The Over-Allotment Option may be exercised within 30 days
after the effective date of the Registration Statement upon written
notice by the Underwriter to the Company advising as to the amount of
Option Securities as to which the option is being exercised, the names
and denominations in which the certificates for such Option Securities
are to be registered and the time and date when such certificates are
to be delivered. Such time and date shall be determined by the
Underwriter but shall not be earlier than four nor later than ten full
business days after the exercise of the Over-Allotment Option (but in
no event more than 40 days after the First Closing Date), nor in any
event prior to the First Closing Date, and such time and date is
referred to herein as the "Over-Allotment Option Closing Date."
Delivery of the Over-Allotment Option Securities against payment
therefor shall take place at the offices of Sonfield & Sonfield, 770
South Post Oak Lane, Suite 435, Houston, Texas 77056 (or at such other
place as may be designated by agreement between the Underwriter and the
Company). The option granted hereunder may be exercised only to cover
Over-Allotments in the sale by the Underwriter of First Securities
referred to in subsection (a) above. No Over-Allotment Option
Securities shall be delivered unless all First Securities shall have
been delivered to the Underwriter as provided herein.
(c) The Company will make the certificates for the Securities
to be purchased by the Underwriter hereunder available for checking at
least two full business days prior to the First Closing Date or the
Over-Allotment Option Closing Date (which are collectively referred to
herein as the "Closing Dates"). The certificates shall be in such names
and denominations as the Underwriter may request, at least three full
business days prior to the Closing Dates. Delivery of the certificates
at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriter.
Definitive certificates in negotiable form for the Securities
to be purchased by the Underwriter hereunder will be delivered by the
Company to the Underwriter against payment of the respective purchase
price by the Underwriter, by wire transfer or certified or bank
cashier's checks in New York Clearing House funds, payable to the order
of the Company registered in such names and in such denominations as
the Underwriter may reasonably request.
In addition, in the event the Underwriter exercises the option
to purchase from the Company all or any portion of the Over-Allotment
Option Securities pursuant to the provisions of subsection (b) above,
payment for such Securities shall be made to or upon the order of the
Company at the offices of Sonfield & Sonfield, 770 South Post Oak Lane,
Suite 435, Houston, Texas 77056, by wire transfer or certified or bank
cashier's checks payable in New York Clearing House funds at the time
and date of delivery of such Securities as required by the provisions
of subsection (b) above, against receipt of the certificates for such
Securities by the Underwriter for the account of the Underwriter
registered in such names and in such denominations as the Underwriter
may reasonably request. It is understood that the Underwriter proposes
to offer the Securities to be purchased hereunder to the public upon
the terms and conditions set forth in the Registration Statement, after
the Registration Statement becomes effective.
3. COVENANTS OF THE COMPANY.
(a) The Company covenants that it will:
(i) Use its best efforts to cause the Registration
Statement to become effective. If required, the Company will
file the Prospectus and any amendment or supplement thereto
with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. Upon notification from
the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any
time, whether before or after the effective date, file any
amendment to the Registration Statement or supplement to the
Prospectus of which the Underwriter shall not previously have
been advised and furnished with a copy or to which you or your
counsel shall have reasonably objected in writing or which is
not in compliance with the Act and the Rules and Regulations.
At any time prior to the later of (A) the completion by the
Underwriter of the distribution of the Securities in no event
more than nine months after the date on which the Registration
Statement shall have become or been declared effective) and
(B) 25 days after the date on which the Registration Statement
shall have become or been declared effective, the Company will
prepare and file with the Commission, promptly the
Underwriter's request, any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of
counsel to the Company and the Underwriter, may be reasonably
necessary or advisable in connection with the distribution of
the Securities.
6
<PAGE>
As soon as the Company is advised thereof, the
Company will advise the Underwriter, and provide you copies of
any written advice, of the receipt of any comments of the
Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any
request made by the Commission for an amendment of the
Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the
issuance by the Commission or any state or regulatory body of
any stop order or other order or threat thereof suspending the
effectiveness of the Registration Statement or any order
preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the
Securities for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and
will use its best efforts to prevent the issuance of any such
order, and, if issued, to obtain as soon as possible the
lifting thereof.
The Company has caused to be delivered to the
Underwriter copies of each Preliminary Prospectus, and the
Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company
authorizes the Underwriter and dealers to use the Prospectus
in connection with the sale of the Securities for such period
as in the opinion of counsel to the Underwriter and the
Company the use thereof is required to comply with the
applicable provisions of the Act and the Rules and
Regulations. In case of the happening, at any time within such
period as a Prospectus is required under the Act to be
delivered in connection with sales by the Underwriter or
dealer, of any event of which the Company has knowledge and
which materially affects the Company or the Securities or
which in the opinion of counsel for the Company and counsel
for the Underwriter should be set forth in an amendment of the
Registration Statement or a supplement to the Prospectus in
order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus
is required to be delivered to a purchaser of the Securities
or in case it shall be necessary to amend or supplement the
Prospectus to comply with law or with the Rules and
Regulations, the Company will notify you promptly and
forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the
Prospectus, in such quantities as you may reasonably request,
in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or
omit to state any material facts necessary in order to make
the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The
preparation and furnishing of any such amendment or supplement
to the Registration Statement or amended Prospectus or
supplement to be attached to the Prospectus shall be without
expense to the Underwriter, except that in case the
Underwriter is required, in connection with the sale of the
Securities to deliver a Prospectus nine months or more after
the effective date of the Registration Statement, the Company
will upon request of and at the expense of the Underwriter,
amend or supplement the Registration Statement and Prospectus
and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
Comply with the Act, the Rules and Regulations and
the Securities Exchange Act of 1934 (the "Exchange Act") and
the rules and regulations thereunder in connection with the
offering and issuance of the Securities.
(ii) Furnish such information as may be required and
to otherwise cooperate and use its best efforts to qualify or
register the Securities for sale under the securities or "blue
sky" laws of such jurisdictions as you the Underwriter may
designate and will make such applications and furnish such
information as may be required for that purpose and to comply
with such laws, provided the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or
to execute a general consent of service of process in any
jurisdiction in any action other than one arising out of the
offering or sale of the Securities. The Company will, from
time to time, prepare and file such statements and reports as
are or may be required to continue such qualification in
effect for so long a period as the counsel to the Company and
the Underwriter deem reasonably necessary.
(iii) If the sale of the Securities provided for
herein is not consummated as a result of the Company not
performing its obligations hereunder in all material respects,
the Company shall pay all costs and expenses incurred by it
which are incident to the performance of the Company's
obligations hereunder, including but not limited to, all of
the expenses itemized in Section 8,
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including the accountable expenses of the Underwriter, up to
$100,000 (including the reasonable fees and expenses of
counsel to the Underwriter).
(iv) Use its best efforts to (i) cause a registration
statement under the Exchange Act to be declared effective
concurrently with the completion of this offering and will
notify you in writing immediately upon the effectiveness of
such registration statement, and (ii) to obtain and keep
current a listing in the Standard & Poors or Moody's
industrial manual.
(v) For so long as the Company is a reporting company
under either Section 12(g) or 15(d) of the Exchange Act, the
Company, at its expense, will furnish to its stockholders an
annual report (including financial statements audited by
independent public accountants), in reasonable detail and at
its expense, will furnish to the Underwriter during the period
ending five (5) years from the date hereof, (i) as soon as
practicable after the end of each fiscal year, but no earlier
than the filing of such information with the Commission a
balance sheet of the Company and any of its Subsidiaries as at
the end of such fiscal year, together with statements of
income, surplus and cash flow of the Company and any
Subsidiaries for such fiscal year, all in reasonable detail
and accompanied by a copy of the certificate or report thereon
of independent accountants; (ii) as soon as practicable after
the end of each of the first three fiscal quarters of each
fiscal year, but no earlier than the filing of such
information with the Commission, consolidated summary
financial information of the Company for such quarter in
reasonable detail; (iii) as soon as they are publicly
available, a copy of all reports (financial or other) mailed
to security holders; (iv) as soon as they are available, a
copy of all non-confidential reports and financial statements
furnished to or filed with the Commission or any securities
exchange or automated quotation system on which any class of
securities of the Company is listed; and (v) such other
information as you may from time to time reasonably request.
(vi) In the event the Company has an active
Subsidiary or Subsidiaries, such financial statements referred
to in subsection (e) above will be on a consolidated basis to
the extent the accounts of the Company and its Subsidiary or
Subsidiaries are consolidated in reports furnished to its
stockholders generally.
(vii) Deliver to the Underwriter at or before the
First Closing Date two signed copies of the Registration
Statement including the Financial Statements and exhibits
filed therewith, and of all amendments thereto, and will
deliver to the Underwriter such number of conformed copies of
the Registration Statement, including the Financial Statements
but without exhibits, and of all amendments thereto, as the
Underwriter may reasonably request. The Company will deliver
to or upon your order, from time to time until the effective
date of the Registration Statement, as many copies of any
Preliminary Prospectus filed with the Commission prior to the
effective date of the Registration Statement as the
Underwriter may reasonably request. The Company will deliver
to the Underwriter on the effective date of the Registration
Statement and thereafter for so long as a Prospectus is
required to be delivered under the Act, from time to time, as
many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriter may from time to
time reasonably request.
(viii) The Company will make generally available to
its security holders and to the registered holders of its
Warrants and deliver to the Underwriter as soon as it is
practicable to do so but in no event later than 90 days after
the end of twelve months after its current fiscal quarter, an
earnings statement (which need not be audited) covering a
period of at least twelve consecutive months beginning after
the effective date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(ix) Apply the net proceeds from the sale of the
Securities substantially for the purposes set forth under "Use
of Proceeds" in the Prospectus.
(x) Promptly prepare and file with the Commission any
amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other
action, which in the opinion of counsel to the Underwriter and
counsel to the Company, may be reasonably necessary or
advisable in connection with the distribution of the
Securities, and will use its best efforts to cause the same to
become effective as promptly as possible.
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(xi) Reserve and keep available the maximum number of
its authorized but unissued securities which are issuable upon
exercise of the Purchase Option outstanding from time to time.
(xii) Upon completion of this offering, the Company
will make all filings required, including registration under
the Exchange Act, to obtain the listing of the Units,
Preferred Stock and the Warrants in the NASDAQ SmallCap Market
system, and will use its best efforts to effect and maintain
such listing for at least five years from the date of this
Agreement.
(xiii) Except for the transactions contemplated by
this Agreement and as disclosed in the Prospectus, the Company
represents that it has not taken and agrees that it will not
take, directly or indirectly, any action designed to or which
has constituted or which might reasonably be expected to cause
or result in the stabilization or manipulation of the price of
any of the Securities.
(xiv) On the First Closing Date and simultaneously
with the delivery of the Securities, the Company shall execute
and deliver to the Underwriter the Underwriter's Purchase
Option. The Underwriter's Purchase Option will be
substantially in the form filed as an Exhibit to the
Registration Statement.
(xv) Intentionally omitted.
(xvi) So long as any Warrants are outstanding, the
Company shall use its best efforts to cause post-effective
amendments to the Registration Statement to become effective
in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then
amended, to be delivered to each holder of record of a Warrant
and to furnish to the Underwriter as many copies of each such
Prospectus as such Underwriter or dealer may reasonably
request. The Company shall not call for redemption of any of
the Warrants unless a registration statement covering the
Securities underlying the Warrants has been declared effective
by the Commission and remains current at least until the date
fixed for redemption.
(xvii) For a period of five (5) years from the
Effective Date, the Company, at its expense, shall cause its
regularly engaged independent certified public accountants to
review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of
the Company's 10-Q quarterly report and the mailing of
quarterly financial information to Securityholders, provided
that the Company shall not be required to file a report of
such accountants relating to such review with the Commission.
(xviii) Agrees to pay the Underwriter a warrant
solicitation fee of 4.0% of the exercise price of any of the
Warrants exercised beginning one (1) year after the Effective
Date (not including warrants exercised by the Underwriter) if
(a) the market price of the Company's Common Stock on the date
the Warrant is exercised is lower than the exercise price of
the Warrant, (b) the exercise of the Warrant was solicited by
the Underwriter and the holder of the warrant designates the
Underwriter in writing as having solicited such Warrant, (c)
the Warrant is not held in a discretionary account, (d)
disclosure of the compensation arrangement is made upon the
sale and exercise of the Warrants, (e) soliciting the exercise
is not in violation of Rule 10b-6 under the Securities
Exchange Act of 1934, and (f) solicitation of the exercise is
in compliance with the NASD Notice to Members 81-38 (September
22, 1981).
(xix) For a period of three years from the Effective
Date, at the request of the Underwriter, the Company shall
provide promptly, at the expense of the Company, copies of the
Company's daily transfer sheets furnished to it by its
transfer agent and copies of the securities position listings
provided to it by the Depository Trust Company and/or
Automatic Data Processing.
(xx) Agrees that:
(i) The Company will pay a finder's fee to
the Underwriter, equal to five percent (5%) of the
first $3,000,000 of the consideration involved in any
transaction, 4% of the next $3,000,000 of
consideration involved in the transaction, 3% of the
next $2,000,000, 2% of the next $2,000,000 and 1% of
the excess, if any, over $10,000,000, for future
consummated transactions, if any, introduced by the
Underwriter (including mergers,
9
<PAGE>
acquisitions, joint ventures, and any other business
for the Company introduced by the Underwriter)
consummated by the Company (an "Introduced
Consummated Transaction"), in which the Underwriter
introduced the other party to the Company during a
period ending five years following the First Closing
Date; and
(ii) That any such finder's fee due
hereunder will be paid in cash or other consideration
that is acceptable to the Underwriter, at the closing
of the particular Introduced Consummated Transaction.
(xxi) For a period of five (5) years following the
Effective Date the Company, at its expense, shall cause its
regularly engaged independent certified public accountants to
review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of
the Company's 10-Q quarterly report and the mailing of
quarterly financial information to stockholders, provided that
the Company shall not be required to file a report of such
accountants relating to such review with the Commission. The
Company will retain its present legal counsel and independent
certified public accountants for at least one year from the
Closing Date.
(xxii) For the three (3) year period commencing on
the First Closing Date, the Underwriter shall have the right
to nominate a member of the Company's Board of Directors. If
the Underwriter does not exercise this right, it may appoint
an advisor who will be able to attend all meetings of the
Board of Directors. However, if the Board of Directors
determines that confidential information is to be discussed
during any part of any meeting attended by such advisor, it
shall have the right to exclude the advisor from the meeting
during such discussion. The Underwriter shall also have the
right to obtain copies of the minutes, if requested, from all
Board of Directors meetings for three (3) years following the
Effective Date of the Registration Statement, whether or not a
nominee of the Underwriter attends or participates in any such
Board meeting. The Company agrees to reimburse the Underwriter
immediately upon the Underwriter's request therefor of any
reasonable travel and lodging expenses directly incurred by
the Underwriter in connection with its representative
attending Company Board meetings on the same basis for other
Board members.
4. CONDITIONS OF UNDERWRITER'S OBLIGATION. The obligations of the Underwriter to
purchase and pay for the Securities which it has agreed to purchase hereunder,
are subject to the accuracy (as of the date hereof, and as of the Closing Dates)
of and compliance with the representations and warranties of the Company herein,
to the performance by the Company of its obligations hereunder, and to the
following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M.,
Eastern time, on the day following the date of this Agreement, or at
such later time or on such later date as to which the Underwriter may
agree in writing; on or prior to the Closing Dates no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that or a similar purpose shall have
been instituted or shall be pending or, to your knowledge or to the
knowledge of the Company, shall be contemplated by the Commission; any
request on the part of the Commission for additional information shall
have been complied with to the satisfaction of the Commission; and no
stop order shall be in effect denying or suspending effectiveness of
such qualification nor shall any stop order proceedings with respect
thereto be instituted or pending or threatened. If required, the
Prospectus shall have been filed with the Commission in the manner and
within the time period required by Rule 424(b) under the Act.
(b) At the First Closing Date, the Underwriter shall have
received the opinion, dated as of the First Closing Date, of Atlas,
Pearlman, Trop & Borkson, P.A., counsel for the Company, in form and
substance satisfactory to counsel for the Underwriter, to the effect
that:
(i) the Company and its Subsidiaries have been duly
incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
organization, with all requisite corporate power and authority
to own their properties and conduct their business as
described in the Registration Statement and Prospectus and are
duly qualified or licensed to do business as foreign
corporations and are in good standing in each other
jurisdiction in which the ownership or leasing of their
properties or conduct of their business requires such
qualification except where the failure to qualify or be
licensed will not have a Material Adverse Effect;
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<PAGE>
(ii) the authorized capitalization of the Company is
as set forth in the Prospectus; the Securities as set forth in
the Prospectus have been duly authorized and upon payment of
consideration therefor, will be validly issued, fully paid and
non-assessable and conform in all material respects to the
description thereof contained in the Prospectus; to such
counsel's knowledge the outstanding shares of capital stock of
the Company and its Subsidiaries have not been issued in
violation of the preemptive rights of any shareholder and to
such counsel's knowledge the shareholders of the Company do
not have any preemptive rights or other rights to subscribe
for or to purchase, nor are there any restrictions upon the
voting or transfer of any of the capital stock except as
provided in the Prospectus or as required by law. The
Securities, the Purchase Option and the Warrant Agreement
conform in all material respects to the respective
descriptions thereof contained in the Prospectus; the shares
of Common Stock underlying the Units, and the shares of Common
Stock issuable upon exercise of Warrants, the Purchase Option,
and the Warrant Agreement will have been duly authorized and,
when issued and delivered in accordance with their respective
terms, will be duly and validly issued, fully paid,
non-assessable, free of preemptive rights to the best of their
knowledge; to the best of their knowledge, all prior sales by
the Company of the Company's securities, have been made in
compliance with or under an exemption from registration under
the Act and applicable state securities laws; a sufficient
number of shares of Common Stock has been reserved for
issuance upon exercise of the Warrants and Common Stock has
been reserved for issuance upon exercise of the Warrants
contained in the Purchase Option and to the best of such
counsel's knowledge, neither the filing of the Registration
Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any registration
rights other than those which have been waived or satisfied
for or relating to the registration of any shares of Common
Stock;
(iii) this Agreement, the Purchase Option, and the
Warrant Agreement have been duly and validly authorized,
executed and delivered by the Company;
(iv) the certificates evidencing the Securities as
described in the Registration Statement comply in all material
respects with the descriptions set forth therein, and comply
with the Delaware General Corporation Law, as in effect on the
date hereof; each Warrant will be exercisable for one share of
the Common Stock of the Company, respectively, and at the
prices provided for in the Warrant Agreement;
(v) except as otherwise disclosed in the Registration
Statement, such counsel knows of no pending or threatened
legal or governmental proceedings to which the Company or its
Subsidiaries are a party which would materially adversely
affect the business, property, financial condition or
operations of the Company or its Subsidiaries; or which
question the validity of the Securities, this Agreement, the
Warrant Agreement or the Purchase Option, or of any action
taken or to be taken by the Company pursuant to this
Agreement, the Warrant Agreement or the Purchase Option; to
such counsel's knowledge there are no governmental proceedings
or regulations required to be described or referred to in the
Registration Statement which are not so described or referred
to;
(vi) the execution and delivery of this Agreement,
the Purchase Option or the Warrant Agreement and the
incurrence of the obligations herein and therein set forth and
the consummation of the transactions herein or therein
contemplated, will not result in a breach or violation of, or
constitute a default under the certificate of incorporation or
by-laws of the Company or its Subsidiaries, or to the best
knowledge of counsel after due inquiry, in the performance or
observance of any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other
evidence of indebtedness or in any material contract,
indenture, mortgage, loan agreement, lease, joint venture or
other agreement or instrument to which the Company or its
Subsidiaries is a party or by which they or any of their
properties is bound or in violation of any order, rule,
regulation, writ, injunction, or decree of any government,
governmental instrumentality or court, domestic or foreign the
result of which would have a Material Adverse Effect;
(vii) the Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for that purpose
have been instituted or are pending before, or threatened by,
the Commission; the Registration Statement and the Prospectus
(except for the financial statements and other financial data
contained therein, or omitted therefrom, as to which
11
<PAGE>
such counsel need express no opinion) as of the Effective Date
comply as to form in all material respects with the applicable
requirements of the Act and the Rules and Regulations;
(viii) in the course of preparation of the
Registration Statement and the Prospectus such counsel has
participated in conferences with the President of the Company
with respect to the Registration Statement and Prospectus and
such discussions did not disclose to such counsel any
information which gives such counsel reason to believe that
the Registration Statement or any amendment thereto at the
time it became effective contained any untrue statement of a
material fact required to be stated therein or omitted to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading or
that the Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state a
material fact necessary in order to make statements therein,
in light of the circumstances under which they were made, not
misleading (except, in the case of both the Registration
Statement and any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements, notes
thereto and other financial information (including without
limitation, the pro forma financial information) and schedules
contained therein, as to which such counsel need express no
opinion);
(ix) all descriptions in the Registration Statement
and the Prospectus, and any amendment or supplement thereto,
of contracts and other agreements to which the Company or its
Subsidiaries is a party are accurate and fairly present in all
material respects the information required to be shown, and
such counsel is familiar with all contracts and other
agreements referred to in the Registration Statement and the
Prospectus and any such amendment or supplement or filed as
exhibits to the Registration Statement, and such counsel does
not know of any contracts or agreements to which the Company
or its Subsidiaries is a party of a character required to be
summarized or described therein or to be filed as exhibits
thereto which are not so summarized, described or filed;
(x) no authorization, approval, consent, or license
of any governmental or regulatory authority or agency is
necessary in connection with the authorization, issuance,
transfer, sale or delivery of the Securities by the Company,
in connection with the execution, delivery and performance of
this Agreement by the Company or in connection with the taking
of any action contemplated herein, or the issuance of the
Purchase Option or the Securities underlying the Purchase
Option, other than registrations or qualifications of the
Securities under applicable state or foreign securities or
Blue Sky laws and registration under the Act; and
(xi) the Units, shares of Common Stock and the
Warrants have been duly authorized for quotation on the NASDAQ
SmallCap Market System ("NASDAQ").
Such opinion shall also cover such matters incident
to the transactions contemplated hereby as the Underwriter or
counsel for the Underwriter shall reasonably request. In
rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials
as to matters of fact; and may rely as to all matters of law
other than the law of the United States or of the State of
Florida or Delaware upon opinions of counsel satisfactory to
you, in which case the opinion shall state that they have no
reason to believe that you and they are not entitled to so
rely.
(c) Intentionally Omitted.
(d) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other
related matters shall be satisfactory to or approved by Sonfield &
Sonfield, counsel to the Underwriter.
(e) You shall have received a letter prior to the Effective
Date and again on and as of the First Closing Date from Moore Stephens,
PC, independent public accountants for the Company, substantially in
the form reasonably acceptable to you, providing you with such "cold
comfort" as you may reasonably require.
(f) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and
correct in all material respects with the same effect as if made on and
as of the Closing Dates taking into account for the Over-Allotment
Option Closing Dates the effect of the transactions contemplated hereby
and the Company or its Subsidiaries shall have performed all of its
obligations hereunder and satisfied all the conditions on its part to
be satisfied at or prior to such Closing Date; (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto
shall
12
<PAGE>
contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and shall in all
material respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; (iii) there
shall have been, since the respective dates as of which information is
given, no material adverse change, or to the Company or its
Subsidiaries' knowledge, any development involving a prospective
material adverse change, in the business, properties, condition
(financial or otherwise), results of operations, capital stock,
long-term or short-term debt or general affairs of the Company or its
Subsidiaries from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and
Prospectus indicate might occur after the effective date of the
Registration Statement, and the Company or its Subsidiaries shall not
have incurred any material liabilities or entered into any material
agreement not in the ordinary course of business other than as referred
to in the Registration Statement and Prospectus; (iv) except as set
forth in the Prospectus, no action, suit or proceeding at law or in
equity shall be pending or threatened against the Company or its
Subsidiaries which would be required to be set forth in the
Registration Statement, and no proceedings shall be pending or
threatened against the Company or its Subsidiaries before or by any
commission, board or administrative agency in the United States or
elsewhere, wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, property, condition
(financial or otherwise), results of operations or general affairs of
the Company or its Subsidiaries, and (v) the Underwriter shall have
received, at the First Closing Date, a certificate signed by each of
the President and the principal operating officer of the Company dated
as of the First Closing Date, evidencing compliance with the provisions
of this subsection (f).
(g) Upon exercise of the Over-Allotment Option, the
obligations of the Underwriter to purchase and pay for the Option
Securities referred to therein will be subject (as of the date hereof
and as of the Option Closing Date) to the following additional
conditions:
(i) The Registration Statement shall remain effective
at the Over-Allotment Option Closing Date, and no stop order
suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been instituted
or shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any
reasonable request on the part of the Commission for
additional information shall have been complied with to the
satisfaction of the Commission.
(ii) At the Over-Allotment Option Closing Date there
shall have been delivered to the Underwriter the signed
opinion of Atlas, Pearlman, Trop & Borkson, P.A., counsel to
the Company, dated as of the Over-Allotment Option Closing
Date, in form and substance reasonably satisfactory to
Sonfield & Sonfield, counsel to the Underwriter, which opinion
shall be substantially the same in scope and substance as the
opinion furnished to you at the First Closing Date pursuant to
Sections 4(b) hereof, except that such opinion, where
appropriate, shall cover the Over-Allotment Option Securities.
(iii) At the Option Closing Date there shall have be
delivered to the Underwriter a certificate of the President
and the principal operating officer of the Company, dated the
Option Closing Date, in form and substance reasonably
satisfactory to Sonfield & Sonfield, counsel to the
Underwriter, substantially the same in scope and substance as
the certificate furnished at the First Closing Date pursuant
to Section 4(f) hereof.
(iv) At the Over-Allotment Option Closing Date there
shall have been delivered to you a letter in form and
substance satisfactory to you from Moore Stephens, dated the
Over-Allotment Option Closing Date and addressed to the
Underwriter confirming the information in their letter
referred to in Section 4(e) hereof and stating that nothing
has come to their attention during the period from the ending
date of their review referred to in said letter to a date not
more than five business days prior to the Over-Allotment
Option Closing Date, which would require any change in said
letter if it were required to be dated the Over-Allotment
Option Closing Date.
(v) All proceedings taken at or prior to the
Over-Allotment Option Closing Date in connection with the sale
and issuance of the Over-Allotment Option Securities shall be
reasonably satisfactory in form and substance to you, and you
and Sonfield & Sonfield, counsel to the Underwriter, shall
have been furnished with all such documents, certificates, and
opinions as you
13
<PAGE>
may reasonably request in connection with this transaction in
order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or
its compliance with any of the covenants or conditions
contained herein.
(h) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to
the Closing Date, for members of the NASD to execute transactions (as
principal or agent) in the Securities and no proceedings for the taking
of such action shall have been instituted or shall be pending, or, to
the knowledge of the Underwriter or the Company, shall be contemplated
by the Commission or the NASD. The Company and the Underwriter
represent that at the date hereof each has no knowledge that any such
action is in fact contemplated against it by the Commission or the
NASD.
(i) If any of the conditions herein provided for in this
Section shall not have been fulfilled in all material respects as of
the date indicated, this Agreement and all obligations of the
Underwriter under this Agreement may be canceled at, or at any time
prior to, each Closing Date by the Underwriter notifying the Company of
such cancellation in writing or by telegram at or prior to the
applicable Closing Date. Any such cancellation shall be without
liability of the Underwriter to the Company.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligation of the Company
to sell and deliver the Securities is subject to the following conditions:
(a) The Registration Statement shall have become effective not
later than 10:00 A.M. Eastern time, on the day following the date of
this Agreement, or on such later date as the Company and the
Underwriter may agree in writing.
(b) At the Closing Dates, no stop orders suspending the
effectiveness of the Registration Statement shall have been issued
under the Act or any proceedings therefor initiated or threatened by
the Commission.
If the conditions to the obligations of the Company
provided for in this Section have been fulfilled on the First Closing
Date but are not fulfilled after the First Closing Date and prior to
the Option Closing Date, then only the obligation of the Company to
sell and deliver the Securities on exercise of the Over-Allotment
Option hereof shall be affected.
6. INDEMNIFICATION.
(a) The Company agrees (i) to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act against any losses, claims, damages or liabilities, joint
or several (which shall, for all purposes of this Agreement, include,
but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees), to which such
Underwriter or such controlling person may become subject, under the
Act or otherwise, and (ii) to reimburse, as incurred, the Underwriter
and such controlling persons for any legal or other expenses reasonably
incurred in connection with investigating, defending against or
appearing as a third party witness in connection with any losses,
claims, damages or liabilities; insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) relating to (i) and (ii)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment
or supplement thereto, (B) any blue sky application or other document
executed by the Company specifically for that purpose containing
written information specifically furnished by the Company and filed in
any state or other jurisdiction in order to qualify any or all of the
Securities under the securities laws thereof (any such application,
document or information being hereinafter called a "Blue Sky
Application"), or arise out of or are based upon the omission or
alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement
thereto, or in any Blue Sky Application, a material fact required to be
stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be required to
indemnify the Underwriter and any controlling person or be liable in
any such case to the extent, but only to the extent, that any such
loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation of the Registration Statement
or any such amendment or supplement thereof or any such Blue Sky
Application or any such preliminary Prospectus or the Prospectus or any
such amendment or supplement thereto, provided, further that the
indemnity with respect to any Preliminary Prospectus shall not
14
<PAGE>
be applicable on account of any losses, claims, damages, liabilities or
litigation arising from the sale of Securities to any person if a copy
of the Prospectus was not delivered to such person at or prior to the
written confirmation of the sale to such person. This indemnity will be
in addition to any liability which the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the
Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of its officers who have signed the
Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims,
damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and reasonable attorneys' fees) to which the Company or
any such director, nominee, officer or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or any Blue Sky Application in
reliance upon and in conformity with written information furnished to
the Company by the Underwriter specifically for use in the preparation
thereof and for any violation by the Underwriter in the sale of such
Securities of any applicable state or federal law or any rule,
regulation or instruction thereunder relating to violations based on
unauthorized statements by Underwriter or its representative; provided
that such violation is not based upon any violation of such law, rule
or regulation or instruction by the party claiming indemnification or
inaccurate or misleading information furnished by the Company or its
representatives, including information furnished to the Underwriter as
contemplated herein. This indemnity agreement will be in addition to
any liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section, notify in writing the
indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under this
Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof,
subject to the provisions herein stated, with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable
to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation.
The indemnified party shall have the right to employ separate counsel
in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of
the action with counsel reasonably satisfactory to the indemnified
party; provided that the reasonable fees and expenses of such counsel
shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the indemnified party
and the indemnifying party and in the reasonable judgment of the
counsel to the indemnified party, it is advisable for the indemnified
party to be represented by separate counsel (in which case the
indemnifying party shall not have the right to assume the defense of
such action on behalf of such indemnified party, it being understood,
however, that the indemnifying party shall not, in connection with any
one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for the
indemnified party, which firm shall be designated in writing by the
indemnified party). No settlement of any action against an indemnified
party shall be made without the consent of the indemnified party, which
shall not be unreasonably withheld in light of all factors of
importance to such indemnified party. If it is ultimately determined
that indemnification is not permitted, then an indemnified party will
return all monies advanced to the indemnifying party.
15
<PAGE>
7. CONTRIBUTION. In order to provide for just and equitable contribution under
the Act in any case in which the indemnification provided in Section 6 hereof is
requested but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case, notwithstanding the fact that the express provisions of
Section 6 provide for indemnification in such case, then the Company and each
person who controls the Company, in the aggregate, and the Underwriter shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees) (after contribution from others) in such proportions
that the Underwriter is responsible in the aggregate for that portion of such
losses, claims, damages or liabilities represented by the percentage that the
underwriting discount for each of the Securities appearing on the cover page of
the Prospectus bears to the public offering price appearing thereon and the
Company shall be responsible for the remaining portion; provided, however, that
if such allocation is not permitted by applicable law then allocated in such
proportion as is appropriate to reflect relative benefits but also the relative
fault of the Company and the Underwriter and controlling persons, in the
aggregate, in connection with the statements or omissions which resulted in such
damages and other relevant equitable considerations shall also be considered.
The relative fault shall be determined by reference to, among other things,
whether in the case of an untrue statement of a material fact or the omission to
state a material fact, such statement or omission relates to information
supplied by the Company or the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriter agree that it
would not be just and equitable if the respective obligations of the Company and
the Underwriter to contribute pursuant to this Section 7 were to be determined
by pro rata or per capita allocation of the aggregate damages or by any other
method of allocation that does not take account of the equitable considerations
referred to in this Section 7. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. As used in this paragraph, the word "Company" includes any
officer, director, or person who controls the Company within the meaning of
Section 15 of the Act. If the full amount of the contribution specified in this
paragraph is not permitted by law, then the Underwriter and each person who
controls the Underwriter shall be entitled to contribution from the Company, its
officers, directors and controlling persons, and the Company, its officers,
directors and controlling persons shall be entitled to contribution from the
Underwriter to the full extent permitted by law. The foregoing contribution
agreement shall in no way affect the contribution liabilities of any persons
having liability under Section 11 of the Act other than the Company and the
Underwriter. No contribution shall be requested with regard to the settlement of
any matter from any party who did not consent to the settlement; provided,
however, that such consent shall not be unreasonably withheld in light of all
factors of importance to such party.
8. COSTS AND EXPENSES.
(a) Whether or not this Agreement becomes effective or the
sale of the Securities to the Underwriter is consummated, the Company
will pay all costs and expenses incident to the performance of this
Agreement by the Company including, but not limited to, the fees and
expenses of counsel to the Company and of the Company's accountants;
the costs and expenses incident to the preparation, printing, filing
and distribution under the Act of the Registration Statement (including
the financial statements therein and all amendments and exhibits
thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the NASD in connection with the filing
required by the NASD relating to the offering of the Securities
contemplated hereby; all expenses, including reasonable fees and
disbursements of counsel to the Underwriter, in connection with the
qualification of the Securities under the state securities or blue sky
laws which the Underwriter shall designate; the cost of printing and
furnishing to the Underwriter copies of the Registration Statement,
each Preliminary Prospectus, the Prospectus, this Agreement, and the
Blue Sky Memorandum, any fees relating to the listing of the Common
Stock and Warrants on NASDAQ or any other securities exchange, the cost
of printing the certificates representing the Securities; fees for
bound volumes and prospectus memorabilia and the fees of the transfer
agent and warrant agent. The Company shall pay any and all taxes
(including any transfer, franchise, capital stock or other tax imposed
by any jurisdiction) on sales to the Underwriter hereunder. The Company
will also pay all costs and expenses incident to the furnishing of any
amended Prospectus or of any supplement to be attached to the
Prospectus as called for in Section 3(a) of this Agreement except as
otherwise set forth in said Section.
(b) In addition to the foregoing expenses, at the First
Closing Date the Company shall pay to the Underwriter a non-accountable
expense allowance of $144,000. In the event the Over-Allotment Option
is exercised, the Company shall pay to the Underwriter at the Option
Closing Date an additional amount in the
16
<PAGE>
aggregate equal to 3% of the gross proceeds received upon exercise of
the Over-Allotment Option. In the event the transactions contemplated
hereby are not consummated by reason of any action by the Underwriter
(except if such prevention is based upon a breach by the Company of any
covenant, representation or warranty contained herein or because any
other condition to the Underwriter's obligations hereunder required to
be fulfilled by the Company is not fulfilled) the Company shall not be
liable for any expenses of the Underwriter, including the Underwriter's
legal fees. In the event the transactions contemplated hereby are not
consummated by reason of the Company being unable to perform their
respective obligations hereunder in all material respects, the Company
and the Selling Stockholder, jointly and severally, shall be liable for
the actual accountable out-of-pocket expenses of the Underwriter,
including reasonable legal fees, not to exceed in the aggregate
$100,000.
(c) Except as disclosed in the Registration Statement, no
person is entitled either directly or indirectly to compensation from
the Company, from the Underwriter or from any other person for services
as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter, against any
losses, claims, damages or liabilities, joint or several (which shall,
for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all reasonable attorneys' fees),
to which the Underwriter or person may become subject insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an
employee of the party claiming indemnity) or entity that he or it is
entitled to a finder's fee in connection with the proposed offering by
reason of such person's or entity's influence or prior contact with the
indemnifying party.
9. EFFECTIVE DATE. The Agreement shall become effective upon its execution
except that the Underwriter may, at its option, delay its effectiveness until
11:00 A.M., Eastern time on the first full business day following the effective
date of the Registration Statement, or at such earlier time on such business day
after the effective date of the Registration Statement as you in your discretion
shall first commence the public offering of the Securities. The time of the
initial public offering shall mean the time of release by you of the first
newspaper advertisement with respect to the Securities, or the time when the
Securities are first generally offered by the Underwriter to dealers by letter
or telegram, whichever shall first occur. This Agreement may be terminated by
the Underwriter at any time before it becomes effective as provided above,
except that Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 shall remain in effect
notwithstanding such termination.
17
<PAGE>
10. TERMINATION.
(a) After this Agreement becomes effective, except for
Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 hereof, it may be terminated
at any time prior to the First Closing Date, by the Underwriter if in
its judgment (i) the Company has sustained a material loss, whether or
not insured, by reason of fire, earthquake, flood, accident or other
calamity, or from any labor dispute or court or government action,
order or decree, (ii) trading in securities on the New York Stock
Exchange or the American Stock Exchange or the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") )having been
suspended or limited, (iii) material governmental restrictions have
been imposed on trading in securities generally (not in force and
effect on the date hereof), (iv) a banking moratorium has been declared
by federal or New York state authorities, (v) an outbreak of major
international hostilities involving the United States or other
substantial national or international calamity has occurred, (vi) a
pending or threatened legal or governmental proceeding or action
relating generally to the Company's business, or a notification has
been received by the Company of the threat of any such proceeding or
action, which would materially adversely affect the Company; (vii)
except as contemplated by the Prospectus, the Company is merged or
consolidated into or acquired by another company or group or there
exists a binding legal commitment for the foregoing or any other
material change of ownership or control occurs; (viii) the passage by
the Congress of the United States or by any state legislative body of
similar impact, of any act or measure, or the adoption of any orders,
rules or regulations by any governmental body or any authoritative
accounting institute or board, or any governmental executive, which is
reasonably believed likely by the Underwriter to have a material
adverse impact on the business, financial condition or financial
statements of the Company; (ix) any material adverse change in the
financial or securities markets beyond normal market fluctuations
having occurred since the date of this Agreement, or (x) any material
adverse change having occurred, since the respective dates of which
information is given in the Registration Statement and Prospectus, in
the earnings, business prospects or general condition of the Company,
financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If the Underwriter elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 10, the Company shall be promptly notified by the Underwriter,
by telephone or telegram, confirmed by letter.
11. UNDERWRITER'S PURCHASE OPTION. At or before the First Closing Date, the
Company will sell the Underwriter or its designees for a consideration of $100,
and upon the terms and conditions set forth in the form of Underwriter's
Purchase Option annexed as an exhibit to the Registration Statement, a option to
purchase an aggregate of 80,000 Units, each Unit consisting of one (1) share of
Series C Convertible Preferred Stock, par value $.0001 per share and one (1)
Series II Redeemable Common Stock Purchase Warrant. In the event of conflict in
the terms of this Agreement and the Underwriter's Purchase Option with respect
to language relating to the Underwriter's Purchase Option, the language of the
Underwriter's Purchase Option shall control.
12. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITER. The Underwriter
represents and warrants to the Company that it is registered as a broker-dealer
in all jurisdictions in which it is offering the Securities and that it will
comply with all applicable state or federal laws relating to the sale of the
Securities, including but not limited to, violations based on unauthorized
statements by the Underwriter or its representatives.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and the Underwriter and the undertakings set forth in
or made pursuant to this Agreement will remain in full force and effect until
three years from the date of this Agreement, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment for
the Securities and the termination of this Agreement.
14. NOTICE. Any communications specifically required hereunder to be in writing,
if sent to the Underwriter, will be mailed, delivered or telecopied and
confirmed to it at FAS Wealth Management Services, Inc., 16935 West Bernardo
Drive, Suite 107, San Diego, California 92127, with a copy sent to Sonfield &
Sonfield, 770 South Post Oak Lane, Suite 435, Houston, Texas 77056, Attention:
Robert L. Sonfield, Jr., Esq., or if sent to the Company, will be mailed,
delivered or telecopied and confirmed to it at 1160B South Rogers Circle, Boca
Raton, Florida 33487, with a copy sent to James N. Schneider, Esq., Atlas,
Pearlman, Trop & Borkson, P.A., 200 East Las Olas Blvd., Suite 1900, Ft.
Lauderdale, Florida 33301. Notice shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication.
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<PAGE>
15. PARTIES IN INTEREST. The Agreement herein set forth is made solely for the
benefit of the Underwriter, the Company, any person controlling the Company or
the Underwriter, and directors of the Company, nominees for directors (if any)
named in the Prospectus, its officers who have signed the Registration
Statement, and their respective executors, administrators, successors, assigns;
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser, as
such purchaser, from the Underwriter of the Securities.
16. APPLICABLE LAW. This Agreement will be governed by, and construed in
accordance with, of the laws of the State of Florida applicable to agreements
made and to be entirely performed within Florida.
17. COUNTERPARTS. This Agreement may be executed in one or more counterparts
each of which shall be deemed to constitute an original and shall become
effective when one or more counterparts have been signed by each of the parties
hereto and delivered to the other parties (including by fax, followed by
original copies by overnight mail).
18. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in writing, signed by the
Underwriter and the Company.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriter in accordance with its
terms.
Very truly yours,
PSI INDUSTRIES, INC.
By:
-----------------------------
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
FAS WEALTH MANAGEMENT SERVICES, INC.
By:
--------------------------------------
Jack A. Alexander, Chairman & CEO
19
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PSI INDUSTRIES, INC.
Pursuant to Section 607.1007 of the Business Corporation Act of the
State of Florida, the undersigned, being all the Board of Directors of PSI
Industries, Inc., (hereinafter the "Corporation"), a Florida corporation
organized and existing under and by virtue of Chapter 607 and Chapter 621 of
laws of the State of Florida (hereinafter "the Corporation"), and desiring to
amend and restate its Articles of Incorporation, does hereby certify:
1. The name of the corporation is PSI Industries, Inc.
2. The Articles of Incorporation of the Corporation were filed with the
Secretary of State of Florida on October 20, 1993, Document #J38802.
3. The Amended and Restated Articles of Incorporation were adopted by
the Board of Directors on February __, 1999, and by Written Consent to Action of
a majority of the Shareholders on February __, 1999. To effect the foregoing,
the text of the Articles of Incorporation is hereby amended and restated as
herein set forth in full:
ARTICLE I - NAME OF CORPORATION
The name of this corporation shall be PSI INDUSTRIES, INC.
ARTICLE II -TERMS OF EXISTENCE
This corporation shall exist perpetually commencing such existence on
October 20, 1986.
ARTICLE III - GENERAL PURPOSE
The general purpose for which this corporation is organized shall be:
(1) To manufacture, construct: purchase or otherwise acquire and to
own, mortgage, pledge, sell, assign, transfer or otherwise dispose of, and to
invest in, trade in, deal in and with products, goods, wares, merchandise, real
and personal property and services of every kind, class and description.
(2) To organize, equip and manage a photographic supply business.
(3) It is intended that this corporation is organized for and may
conduct and transact any or all lawful business authorized and not prohibited by
Chapter 607, Florida
<PAGE>
Statutes, as the same may be from time to time amended. Provided, however, and
notwithstanding the generality of the foregoing, this corporation is not to
conduct a banking, safe deposit, trust, insurance, surety, express, building and
loan association, mutual fire insurance association, cooperative association,
fraternal benefit society, state fair or exposition business.
ARTICLE IV - CAPITAL STOCK
The maximum number of shares of capital stock that this Corporation is
authorized to issue and have outstanding at any one time is sixty-five million
(65,000,000) shares, comprised of:
(i) Sixty million (60,000,000) shares of Common Stock, having a par
value of $.0001 per share; and
(ii) Five million (5,000,000) shares of Preferred Stock, having a par
value of $.0001 per share, which may be issued from to time in one
or more series. The number of shares, the stated value and
dividend rate, if any, of each such series and the preferences and
relative, participating and special rights and the qualifications,
limitations or restrictions shall be fixed in the case of each
series by the Board of Directors at the time of issuance subject
in all cases to the laws of the State of Florida applicable
thereto and determined in accordance with the provisions of
Section 607.0602 of the Florida Business Corporation Act.
SERIES A CONVERTIBLE PREFERRED STOCK
The Corporation is hereby authorized to issue up to 200,000 shares of a
Series of Preferred Stock which shall be entitled "Series A Convertible
Preferred Stock" (the "Series A Preferred"), which shall have the following
preferences, rights, qualifications, limitations or restrictions:
1. VOTING RIGHTS. Except as otherwise provided by law, the holders of
Series A Preferred, by virtue of their ownership thereof, shall be entitled to
cast the number of votes per share thereof on each matter submitted to the
Corporation's shareholders for voting which equals the number of votes which
could be cast by the holders of the number of shares of Common Stock into which
such shares of Series A Preferred could be converted pursuant to Section 4
hereof immediately prior to the taking of such vote. Such vote shall be cast
together with those cast by the holders of Common Stock and not as a separate
class except as otherwise provided by law. The Series A Preferred shall not have
cumulative voting rights.
2. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time any Series A
Preferred shall
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be outstanding, the holders of the then outstanding Series A Preferred shall
have a preference against the property of the Corporation available for
distribution to the holders of the Corporation's equity securities equal to the
amount of $30.00 per share, together with an amount equal to all unpaid
dividends accrued thereon to the date of payment of such preference (the
"Preferential Amount"), whether or not funds of the Corporation are legally
available therefor and whether or not declared by the Board. In addition, the
holders of the Series A Preferred shall be entitled to receive a participating
share of any further assets available for distribution to holders of Common
Stock, whether by reason of declared and unpaid dividends or otherwise, which
participating share shall be the same as that which such holders would have been
entitled to receive if, on the record date for determining the recipients of
such distributions, such holders were the holders of record of the number of
shares of Common Stock into which the outstanding shares of Series A Preferred
were then convertible. In the event the assets of the Corporation available for
distribution to the holders of shares of the Series A Preferred upon
dissolution, liquidation or winding up of the Corporation shall be insufficient
to pay in full all amounts to which such holders are entitled pursuant to the
immediately preceding portions of this paragraph, no such distribution shall be
made on account of any shares of any other class or series of capital stock of
the Corporation ranking on a parity with or junior to the shares of the Series A
Preferred and any other class of shares ranking on a parity with the Series A
Preferred, ratably, in proportion to the full distributable amounts for which
holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up.
3. DIVIDENDS. Holders of record of shares of Series A Preferred, out of
funds legally available therefor, shall be entitled to receive dividends on
their shares, which dividends shall accrue at the rate per share of 5% per annum
of the stated amount of $30.00 ($1.50 per share per year for each full year)
commencing on the date of issuance, in cash. Dividends on shares of Series A
Preferred shall be cumulative, and no dividends or other distributions shall be
paid or declared and set aside for payment on the Common Stock or any other
capital stock of the Corporation ranking junior to the Series A Preferred until
full cumulative dividends on all outstanding shares of Series A Preferred shall
have been paid or declared and set aside for payment. Dividends shall be payable
in arrears at the rate of $.75 per share for each six-month period on each
January 1 and July 1 of each calendar year, to the holders of record of the
Series A Preferred as they appear on the stock record books of the Corporation
on such record dates not more than sixty (60) nor less than ten (10) days
preceding the payment dates thereof, as shall be fixed by the Board of Directors
of the Corporation or a duly authorized committee thereof; provided, however,
that the initial dividend for the Series A Preferred shall accrue for the period
commencing the date of issuance through January 1, 1998. If, in any six-month
period, insufficient funds are available to pay such dividends as are then due
and payable with respect to the Series A Preferred and all other classes and
series of capital stock ranking in parity thereof (or such payment is otherwise
prohibited by provisions of the Florida Business Corporation Law as then in
effect), such funds (or shares of Series A Preferred) as are legally available
to pay such
3
<PAGE>
dividends shall be paid to the holders of the Series A Preferred and to the
holders of such other classes and series of capital stock, on a PRO RATA basis,
in accordance with the rights of each such holder, and the balance of accrued
but undeclared and/or unpaid dividends shall be declared and paid on the next
succeeding dividend date to the extent that funds (or shares of Series A
Preferred) are then legally available for such purpose. Each reference herein to
the Common Stock includes each other class or series of capital stock, if any,
ranking junior to the Series A Preferred that may be authorized from time to
time.
4. CONVERSION.
(A) GENERAL. For the purposes of conversion, the Series A
Preferred shall be valued at $30.00 per share ("Value"), and, if converted, the
Series A Preferred shall be converted into shares of Common Stock (the
"Conversion Stock") at the price per share of $2.50 per share of Conversion
Stock ("Conversion Price"), subject to adjustment pursuant to the provisions of
this Section 4.
(B) ADJUSTMENT IN CONVERSION PRICE. In the event that the
average of the Corporation's earnings per share for its 1997 and 1998 fiscal
years, on a fully diluted basis, as reflected on the Corporation's audited
financial statements for each of these fiscal years (the "Average EPS"), is less
than $.20 per share, then the conversion price shall be reduced to a number that
equals 15 times the Average EPS, provided that in no event shall the conversion
price be reduced below $2.50.
(C) RIGHT TO CONVERSION. At any time from and after the date
of issuance, any holder of Series A Preferred shall have the right, at such
holder's option, to convert such shares into Conversion Stock.
(D) METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW SERIES A
PREFERRED; TRANSFER AND EXCHANGE. The conversion right granted by Section 4(C)
hereof may be exercised, in whole or in part, by the surrender of the stock
certificate or stock certificates representing Series A Preferred to be
converted at the principal office of the Corporation (or at such other place as
the Corporation may designate in a written notice sent to the holder by
first-class mail, postage prepaid, at its address shown on the books of the
Corporation) accompanied by written notice of election to convert against
delivery of that number of whole shares of Common Stock as shall be computed by
dividing (1) the aggregate value of the Series A Preferred so surrendered by (2)
tile Conversion Price in effect at the time of such surrender. At the time of
conversion of a share of Series A Preferred, the Corporation shall pay in cash
to the holder thereof an amount equal to all unpaid dividends accrued thereon to
the date of conversion, or at the Corporation's option additional shares of
Common Stock calculated based on the assumption that the unpaid dividends were
satisfied by the issuance of additional shares of Series A Preferred which were
surrendered for conversion, whether or not funds of the Corporation are legally
available therefor and
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whether or not declared by the Board. Each Series A Preferred stock certificate
surrendered for conversion shall be endorsed by its holder. In the event of any
exercise of the conversion right of the Series A Preferred granted herein, (i)
stock certificates for the shares of Common Stock purchased by virtue of such
exercise shall be delivered to such holder forthwith, and (ii) unless the Series
A Preferred has been fully converted, a new Series A Preferred stock
certificate, representing the Series A Preferred not so converted, if any, shall
also be delivered to such holder forthwith. The stock certificates for the
shares of Common Stock so purchased shall be dated the date of such surrender
and the holder making such surrender shall be deemed for all purposes to be the
holder of the shares of Common Stock so purchased as of the date of such
surrender.
(E) MANDATORY CONVERSION. At any time after one year from the
date of issuance, the Corporation can require that all outstanding shares of
Series A Preferred be automatically converted at the conversion price then in
effect ("Mandatory Conversion") if at the time (i) the closing bid of the
Corporation's Common Stock has exceeded $7.50 per share for a period of 20
consecutive trading days, (ii) the Corporation's Common Stock has been listed on
NASDAQ or another national securities exchange, and (iii) a registration
statement covering the shares of Common Stock issuable upon conversion of the
Series A Preferred has been filed with the Securities and Exchange Commission
and declared effective. At the time of Mandatory Conversion, the Corporation
shall pay in cash to holder thereof an amount equal to all unpaid dividends
accrued thereon to the date of Mandatory Conversion. Notice shall be mailed
within ten (10) days after the Mandatory Conversion, by the Corporation to each
holder of Series A Preferred by first-class mail, postage prepaid, to such
holder's most current address shown on the books of the Corporation. Such notice
shall specify the date on which Mandatory Conversion occurred and call upon such
holder to surrender to the Corporation, in the manner and at the place
designated in such notice, the certificate or certificates representing the
shares of Series A Preferred so converted. In the event of Mandatory Conversion,
the Corporation shall forthwith transmit to each holder of Series A Preferred
upon surrender of the certificate(s) representing such shares, stock
certificates for the shares of Common Stock issued as a result thereof, date the
date of Mandatory Conversion, and such holder shall be deemed for all purposes
to be the holder of such Common Stock as of the date of Mandatory Conversion.
(F) STOCK FULLY PAID; RESERVATION OF SHARES. All shares of
Common Stock which may be issued upon conversion of Series A Preferred will,
upon issuance, by duly issued, fully paid and nonassessable and free from all
taxes, liens, and charges with respect to the issue thereof. At all times that
any Series A Preferred is outstanding, the Corporation shall have authorized,
and shall have reserved for the purpose of issuance upon such conversion, a
sufficient number of shares of Common Stock to provide for the conversion into
Common Stock of all Series A Preferred then outstanding at the then effective
Conversion Price. Without limiting the generality of the foregoing, if, at any
time, the Conversion Price is decreased, the number of shares of
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Common Stock authorized and reserved for issuance upon the conversion of Series
A Preferred shall be proportionately increased.
(G) FURTHER ADJUSTMENT OF CONVERSION PRICE AND NUMBER OF
SHARES. The number of shares of Common Stock issuable upon conversion of Series
A Preferred and the Conversion Price shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
(1) RECLASSIFICATION, CONSOLIDATION OR MERGER. In
case of any reclassification or change of outstanding Common
Stock issuable upon conversion of Series A Preferred (other
than a change in par value, or from par value to no par value,
or from no par value to par value, or as a result of
subdivision or combination), or in case of any consolidation
or merger of the Corporation with or into another corporation
(other than a merger with another corporation in which the
Corporation is the surviving corporation and which does not
result in any reclassification or change -- other than a
change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a
subdivision or combination -- of outstanding Common Stock
issuable upon such conversion) the rights of the holders of
the outstanding Series A Preferred shall be adjusted in the
manner described below:
(a) In the event that the Corporation is the
surviving corporation, the Series A Preferred shall,
without payment of additional consideration therefor,
be deemed modified so as to provide that upon
conversion thereof the holder of the Series A
Preferred being converted shall procure, in lieu of
each share of Common Stock theretofore issuable upon
such conversion, the kind and amount of shares of
stock, other securities, money and property
receivable upon such reclassification, change,
consolidation or merger by the holder of one share of
Common Stock issuable upon such conversion had
conversion occurred immediately prior to such
reclassification, change, consolidation or merger.
The Series A Preferred shall be deemed thereafter to
provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments
provided for in this Section 4. The provisions of
this clause (a) shall apply in the same manner to
successive reclassifications, changes, consolidations
and mergers.
(b) In the event that the Corporation is not
the surviving corporation, the surviving corporation
shall, without payment of any additional
consideration thereof, issue new Series A Preferred,
providing that upon conversion thereof, the holder
thereof shall procure in lieu of each share of Common
Stock theretofore issuable
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upon conversion of the Series A Preferred, the kind
and amount of shares of stock, other securities,
money and property receivable upon such
reclassification, change, consolidation or merger by
the holder of one share of Corporation issuable upon
conversion of the Series A Preferred had such
conversion occurred immediately prior to such
reclassification, change, consolidation or merger.
Such new Series A Preferred shall provide for
adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in
this Section 4. The provisions of this clause (b)
shall apply in the same manner to successive
reclassifications, changes, consolidations and
mergers.
(2) SUBDIVISION OR COMBINATION OF SHARES. If the
Corporation, at any time while any of the Series A Preferred
is outstanding, shall subdivide or combine its Common Stock,
the Conversion Price shall be proportionately reduced, in case
of subdivision of shares, as of the effective date of such
subdivision, or if the Corporation shall take a record of
holders of its Common Stock for the purpose of a subdividing,
as of such record date, whichever is earlier, or shall be
proportionately increased, in the case of combination of
shares, as of the effective date of such combination or, if
the Corporation shall take a record of holders of this Common
Stock for the purpose of so combining, as of such record date,
whichever is earlier.
(3) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the
Corporation, at any time while any of the Series A Preferred
is outstanding, shall:
(a) STOCK DIVIDENDS. Pay a dividend payable
in Common Stock, effect a stock split or make any
other distribution of Common Stock in respect of its
Common Stock, the Conversion Price shall be adjusted,
as of the date the Corporation shall take a record of
the holders of its Common Stock for the purpose of
receiving such dividend, stock split or other
distribution (or if no such record is taken, as of
the date of such payment or other distribution), to
that price determined by multiplying the Conversion
Price theretofore in effect by a fraction (1) the
numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior
to such dividend, stock split or distribution and (2)
the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after
such dividend, stock split or distribution (plus in
the event that the Corporation paid cash for
fractional shares, the number of additional shares
which would
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have been outstanding had the Corporation issued
fractional shares in connection with said dividend,
stock split or distribution); or
(b) LIQUIDATING DIVIDENDS, ETC. Make a
distribution of its property to the holders of its
Common Stock as a dividend in liquidation or partial
liquidation or by way of return of capital or other
than as a dividend payable out of funds legally
available for dividends under the Articles of
Incorporation and the laws of the State of Utah, the
holders of the Series A Preferred shall, upon
conversion thereof, be entitled to receive, in
addition to the number of shares of Common Stock
receivable thereupon, and without payment of any
consideration therefor, a sum equal to the amount of
such property as would have been payable to them as
owners of that number of shares of Common Stock of
the Corporation receivable upon such conversion, had
they been the holders of record of such Common Stock
on the record date for such distribution and an
appropriate provision therefor shall be made a part
of any such distribution.
(4) SALES OF COMMON STOCK AT A PRICE BELOW THE
CONVERSION PRICE. If at any time the Corporation sells shares
of its Common Stock at a per share price that is below the
then current conversion price with respect to the Series A
Preferred, the conversion price of the Series A Preferred
shall be correspondingly adjusted to account for the decrease
in the Company's tangible book value per share.
(H) NOTICE OF ADJUSTMENTS. Whenever the Conversion Price shall
be adjusted pursuant to Subsection 4(F) hereof, the Corporation shall make a
certificate signed by its President or a Vice President and by its Treasurer,
Assistant Treasurer, Security or Assistant Secretary, setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Board of Directors made any determination
hereunder), and the Conversion Price after giving effect to such adjustment, and
shall cause copies of such certificate to be mailed (by first-class mail,
postage prepaid) to each holder of Series A Preferred at its address shown on
the books of the Corporation. The Corporation shall make such certificate and
mail it to each such holder promptly after each adjustment.
(I) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued in connection with any conversion of Series A Preferred, but in
lieu of such fractional shares, the Corporation shall make a cash payment
therefor equal in amount to the product of the applicable fraction multiplied by
the Conversion Price then in effect.
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(J) NO REISSUANCE OF SERIES A PREFERRED. No shares of Series A
Preferred which have been converted into Common Stock shall be reissued by the
Corporation; PROVIDED HOWEVER, that each such share, after being retired and
cancelled, shall be restored to the status of an authorized but unissued share
of Preferred Stock without designation as to series and may thereafter be issued
as a share of Preferred Stock not designated Series A Preferred.
SERIES B CONVERTIBLE PREFERRED STOCK
The Corporation is hereby authorized to issue up to 20,000 shares of a
Series of Preferred Stock which shall be entitled "Series B Convertible
Preferred Stock" (the "Series B Preferred"), which shall have the following
preferences, rights, qualifications, limitations or restrictions:
1. VOTING RIGHTS. Except as otherwise provided by law, the holders of
Series B Preferred, by virtue of their ownership thereof, shall not have any
voting rights.
2. LIQUIDATION RIGHTS. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, at any time any Series B
Preferred shall be outstanding, the holders of the then outstanding Series B
Preferred shall have a preference on an equal and pro-rata basis with holders of
the Company's Series A Convertible Preferred Stock against the property of the
Corporation available for distribution to the holders of the Corporation's
equity securities equal to the amount of $100.00 per share.
3. DIVIDENDS. Holders of record of shares of Series A Preferred, shall
not receive dividends on their shares.
4. CONVERSION.
(A) GENERAL. For the purposes of conversion, the Series B
Preferred shall be valued at $100.00 per share ("Value"), and, if converted, the
Series B Preferred shall be converted into shares of Common Stock (the
"Conversion Stock") at the price per share of $3.00 per share of Conversion
Stock ("Conversion Price"), subject to adjustment pursuant to the provisions of
this Section 4.
(B) RIGHT TO CONVERSION. At any time from and after the date
of issuance, any holder of Series B Preferred shall have the right, at such
holder's option, to convert such shares into Conversion Stock.
(C) METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW SERIES B
PREFERRED; TRANSFER AND EXCHANGE. The conversion right granted by Section 4(B)
hereof may be exercised, in whole or in part, by the surrender of the stock
certificate or stock certificates representing Series B Preferred to be
converted at the
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<PAGE>
principal office of the Corporation (or at such other place as the Corporation
may designate in a written notice sent to the holder by first-class mail,
postage prepaid, at its address shown on the books of the Corporation)
accompanied by written notice of election to convert against delivery of that
number of whole shares of Common Stock as shall be computed by dividing (1) the
aggregate value of the Series B Preferred so surrendered by (2) the Conversion
Price in effect at the time of such surrender. Each Series B Preferred stock
certificate surrendered for conversion shall be endorsed by its holder. In the
event of any exercise of the conversion right of the Series B Preferred granted
herein, (i) stock certificates for the shares of Common Stock purchased by
virtue of such exercise shall be delivered to such holder forthwith, and (ii)
unless the Series B Preferred has been fully converted, a new Series B Preferred
stock certificate, representing the Series B Preferred not so converted, if any,
shall also be delivered to such holder forthwith. The stock certificates for the
shares of Common Stock so purchased shall be dated the date of such surrender
and the holder making such surrender shall be deemed for all purposes to be the
holder of the shares of Common Stock so purchased as of the date of such
surrender.
(D) STOCK FULLY PAID, RESERVATION OF SHARES. All shares of
Common Stock which may be issued upon conversion of Series B Preferred will,
upon issuance, by duly issued, fully paid and nonassessable and free from all
taxes, liens, and charges with respect to the issue thereof. At all times that
any Series B Preferred is outstanding, the Corporation shall have authorized,
and shall have reserved for the purpose of issuance upon such conversion, a
sufficient number of shares of Common Stock to provide for the conversion into
Common Stock of all Series B Preferred then outstanding at the then effective
Conversion Price. Without limiting the generality of the foregoing, if, at any
time, the Conversion Price is decreased, the number of shares of Common Stock
authorized and reserved for issuance upon the conversion of Series B Preferred
shall be proportionately increased.
(E) FURTHER ADJUSTMENT OF CONVERSION PRICE AND NUMBER OF
SHARES. The number of shares of Common Stock issuable upon conversion of Series
B Preferred and the Conversion Price shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
(1) RECLASSIFICATION, CONSOLIDATION OR MERGER. In
case of any reclassification or change of outstanding Common
Stock issuable upon conversion of Series B Preferred (other
than a change in par value, or from par value to no par value,
or from no par value to par value, or as a result of
subdivision or combination), or in case of any consolidation
or merger of the Corporation with or into another corporation
(other than a merger with another corporation in which the
Corporation is the surviving corporation and which does not
result in any reclassification or change -- other than a
change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a
subdivision or
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<PAGE>
combination -- of outstanding Common Stock issuable upon such
conversion) the rights of the holders of the outstanding
Series B Preferred shall be adjusted in the manner described
below:
(a) In the event that the Corporation is the
surviving corporation, the Series B Preferred shall,
without payment of additional consideration therefor,
be deemed modified so as to provide that upon
conversion thereof the holder of the Series B
Preferred being converted shall procure, in lieu of
each share of Common Stock theretofore issuable upon
such conversion, the kind and amount of shares of
stock, other securities, money and property
receivable upon such reclassification, change,
consolidation or merger by the holder of one share of
Common Stock issuable upon such conversion had
conversion occurred immediately prior to such
reclassification, change, consolidation or merger.
The Series B Preferred shall be deemed thereafter to
provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments
provided for in this Section 4. The provisions of
this clause (a) shall apply in the same manner to
successive reclassifications, changes, consolidations
and mergers.
(b) In the event that the Corporation is not
the surviving corporation, the surviving corporation
shall, without payment of any additional
consideration thereof, issue new Series B Preferred,
providing that upon conversion thereof, the holder
thereof shall procure in lieu of each share of Common
Stock theretofore issuable upon conversion of the
Series B Preferred, the kind and amount of shares of
stock, other securities, money and property
receivable upon such reclassification, change,
consolidation or merger by the holder of one share of
Corporation issuable upon conversion of the Series B
Preferred had such conversion occurred immediately
prior to such reclassification, change, consolidation
or merger. Such new Series B Preferred shall provide
for adjustments which shall be as nearly equivalent
as may be practicable to the adjustments provided for
in this Section 4. The provisions of this clause (b)
shall apply in the same manner to successive
reclassifications, changes, consolidations and
mergers.
(2) SUBDIVISION OR COMBINATION OF SHARES. If the
Corporation, at any time while any of the Series B Preferred
is outstanding, shall subdivide or combine its Common Stock,
the Conversion Price shall be proportionately reduced, in case
of subdivision of shares, as of the effective date of such
subdivision, or if the Corporation shall take a record of
holders of its Common Stock for the purpose of a subdividing,
as of
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<PAGE>
such record date, whichever is earlier, or shall be
proportionately increased, in the case of combination of
shares, as of the effective date of such combination or, if
the Corporation shall take a record of holders of this Common
Stock for the purpose of so combining, as of such record date,
whichever is earlier.
(3) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the
Corporation, at any time while any of the Series B Preferred
is outstanding, shall:
(a) STOCK DIVIDENDS. Pay a dividend payable
in Common Stock, effect a stock split or make any
other distribution of Common Stock in respect of its
Common Stock, the Conversion Price shall be adjusted,
as of the date the Corporation shall take a record of
the holders of its Common Stock for the purpose of
receiving such dividend, stock split or other
distribution (or if no such record is taken, as of
the date of such payment or other distribution), to
that price determined by multiplying the Conversion
Price theretofore in effect by a fraction (1) the
numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior
to such dividend, stock split or distribution and (2)
the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after
such dividend, stock split or distribution (plus in
the event that the Corporation paid cash for
fractional shares, the number of additional shares
which would have been outstanding had the Corporation
issued fractional shares in connection with said
dividend, stock split or distribution); or
(b) LIQUIDATING DIVIDENDS, ETC. Make a
distribution of its property to the holders of its
Common Stock as a dividend in liquidation or partial
liquidation or by way of return of capital or other
than as a dividend payable out of funds legally
available for dividends under the Articles of
Incorporation and the laws of the State of Florida,
the holders of the Series B Preferred shall, upon
conversion thereof, be entitled to receive, in
addition to the number of shares of Common Stock
receivable thereupon, and without payment of any
consideration therefor, a sum equal to the amount of
such property as would have been payable to them as
owners of that number of shares of Common Stock of
the Corporation receivable upon such conversion, had
they been the holders of record of such Common Stock
on the record date for such distribution and an
appropriate provision therefor shall be made a part
of any such distribution.
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(F) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued in connection with any conversion of Series B Preferred, but in
lieu of such fractional shares, the Corporation shall make a cash payment
therefor equal in amount to the product of the applicable fraction multiplied by
the Conversion Price then in effect.
(G) NO REISSUANCE OF SERIES B PREFERRED. No shares of Series B
Preferred which have been converted into Common Stock shall be reissued by the
Corporation; PROVIDED HOWEVER, that each such share, after being retired and
cancelled, shall be restored to the status of an authorized but unissued share
of Preferred Stock without designation as to series and may thereafter be issued
as a share of Preferred Stock not designated Series B Preferred.
ARTICLE V - INITIAL REGISTERED OFFICE
AND REGISTERED AGENT
The initial street address of the registered office of this corporation
in the State of Florida will be 200 Sweetwater Square, Fox Valley Drive,
Longwood, Florida 32779. The Board of Directors may from time to time move the
registered office to any other address in Florida. The name of the initial
registered agent of this corporation at that address is Stephen C.L. Chong. The
Board of Directors may from time to time designate a new registered agent.
ARTICLE VI - AMENDMENT TO ARTICLES
This corporation reserves the right to amend or repeal any provisions
contained in these Articles of Incorporation, or any amendment hereto any right
conferred upon the shareholders is subject to this reservation.
ARTICLE VII - INDEMNIFICATION
The corporation shall indemnify any registered agent, officer, director
or incorporator, or any former registered agent, officer or director, to the
full extent permitted by law.
The foregoing Amended and Restated Articles and Amendments were adopted
by the Board of Directors of the Corporation pursuant to a Written Consent of
all of the Board of Directors of the Corporation, and by a majority of the
Shareholders of the Common Stock, acting by Written Consent pursuant to Sections
607.0821 and 607.0704 of the Florida Business Corporation Act. Therefore, the
number of votes cast to amend and restate the Corporation's Articles of
Incorporation was sufficient for approval.
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IN WITNESS WHEREOF, these Amended and Restated Articles of
Incorporation of PSI Industries, Inc., a Florida corporation, have been executed
this ___ day of February, 1999.
--------------------------------------
Dominick Seminara, Chairman and
Chief Executive Officer
14
EXHIBIT 4.1
SERIES C CONVERTIBLE PREFERRED STOCK
The Corporation is authorized to issue up to 1,000,000 shares of a
Series of Preferred Stock which shall be entitled "Series C Convertible
Preferred Stock" (the "Series C Preferred"), which shall have the following
preferences, rights, qualifications, limitations or restrictions.
1. VOTING.
(A) The holders of the Series C Preferred shall be entitled to
that number of votes per share of Series C Preferred equal to the number of
shares of Common Stock into which such share of Series C Preferred is
convertible. Such holders shall be entitled to cast such votes on any matter
which is submitted to the holders of the Corporation's Common Stock and, except
as provided in Section 1(B), shall vote with the holders of the Common Stock as
a single class.
(B) The Corporation shall not, without the affirmative vote or
consent of the holders of shares representing at least a majority of the shares
of Series C Preferred then outstanding, acting as a separate class:
(1) in any manner authorize or create any class of
capital stock ranking, either as to payment of dividends or
distribution of assets, prior to or on a parity with the
Series C Preferred; or
(2) in any manner alter or change the designations,
powers, preferences or rights or the qualifications,
limitations or restrictions of the Series C Preferred;
provided, however, that, except as otherwise provided by law, any such vote or
consent by the holders of the Series C Preferred shall be sufficient
authorization, insofar as the need to obtain approval of the Series C Preferred
is concerned, for any such action, and when such action is effected upon such
vote or consent of the Series C Preferred, holders of shares of the Series C
Preferred dissenting from such action shall not have any rights to payment for
their shares by reason of this provision.
2. LIQUIDATION RIGHTS, DISSOLUTION OR WINDING UP. In the event of any
liquidation, dissolution or winding up of the Corporation, the holders of shares
of the Series C Preferred then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
whether from capital, surplus or earnings, before any payment shall be made to
the holders of shares of any other class or series of the capital stock of the
Corporation, $.0001 per share of Series C Preferred together with any accrued
but unpaid dividends (whether or not declared) to the date of payment. If, upon
any liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of the Series C Preferred, the full amounts to
which they respectively shall be entitled, the holders of share of the Series C
Preferred shall share
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ratably in any distribution of assets in proportion of their respective
ownership of Series C Preferred. In the event of any liquidation, dissolution or
winding up of the Corporation, after payment shall have been made to the holders
of shares of the Series C Preferred of the full amount to which they shall be
entitled as aforesaid, the holders of shares of all other classes and series of
the capital stock of the Corporation, to the exclusion of the holders of shares
of the Series C Preferred, shall be entitled to share, according to their
respective rights and preferences, in all remaining assets of the Corporation
available for distribution to its stockholders. The consolidation or merger of
the Corporation with or into any other corporation or corporations shall not be
deemed to be a liquidation, dissolution or winding up of the Corporation unless
the effect thereof shall be to cause a distribution of assets among its
stockholders.
3. CONVERSION AND DIVIDENDS.
(A) Each share of the Series C Preferred shall automatically
convert on the second anniversary of the effective date of the registration
statement filed by the Corporation under the Securities Act of 1933 relating to
the Series C Preferred (the "Effective Date"), without any action on the part of
the holder thereof or the Corporation, into that number of shares of Common
Stock, par value $.0001 per share, of the Corporation ("Common Stock") equal to
(i) 80% of the average bid price of the Common Stock for the 20 trading days
prior to the effective date of the Corporations Registration Statement on Form
SB-2, which resulting number shall in no event be less than $1.25, divided into
(ii) $5.75, the offering price attributable to the Series C Preferred. No
fractional shares of Common Stock shall be issued upon conversion of the Series
C Preferred Stock, and the number of shares of Common Stock to be issued shall
be rounded up to the nearest whole share.
(B) Holders of the Series C Preferred will be entitled, when
and as declared by the Board of Directors, to receive, in respect of the two
years before the Series C Preferred converts, an annual dividend per share equal
to 2% of the $5.75 offering price of the Series C Preferred sold as part of the
Units, or $0.115 per share. Such dividends shall accrue from the Effective Date
and shall be payable on each of the two anniversaries following the Effective
Date, in cash or shares of Common Stock at the option of the Corporation. The
aforementioned dividends shall be cumulative and no dividends shall be paid or
set apart in respect of the Common Stock or any other class of securities which
ranks junior to the Series C Preferred unless and until all accrued and unpaid
dividends upon such Series C Preferred have been paid or set apart in full. No
interest shall accrue with respect to dividends in arrears.
(C) The number of shares of Common Stock to be issued upon the
conversion of Series C Preferred shall be subject to proportional adjustment
from time to time as follows:
(1) If the Corporation at any time shall consolidate
or merge with or sell or convey all or substantially all of
its assets to any other corporation or partnership, the shares
of the Series C Preferred then outstanding shall be
convertible into such number and kind of securities and
property as would have been issuable or distributable on
account of
2
<PAGE>
such consolidation, merger, sale or conveyance upon or with
respect to the shares of Common Stock into which the Series C
Preferred is convertible.
(2) If the Corporation shall at any time re-classify
or change the outstanding Common Stock into a different type
of security or securities or other property ("Reclassified
Securities"), then each holder of Series C Preferred, at such
holder's sole option, shall thereafter be entitled to convert
any share of Series C Preferred held by such holder into such
number of Reclassified Securities as would have been issuable
to such holder of Series C Preferred, had such holder
converted such share of Series C Preferred into Common Stock
immediately prior to the reclassification or change of Common
Stock into such Reclassified Securities.
(3) If the Corporation at any time pays to the
holders of the Common Stock a dividend in Common Stock, the
number of shares of Common Stock issuable upon conversion of
the then outstanding shares of the Series C Preferred shall be
proportionately increased, effective as of the close of
business on the record date for determination of the holders
of the Common Stock entitled to such dividend.
(D) The Corporation shall undertake to have authorized and
thereafter reserve and keep available out of its authorized but unissued shares
of Common Stock or its treasury shares, solely for the purpose of issuing upon
the conversion of the shares of the Series C Preferred, such number of shares of
Common Stock as shall then be issuable upon the conversion of all of the then
outstanding shares of the Series C Preferred.
4. NO REISSUANCE OF SERIES C PREFERRED. No share or shares of the
Series C Preferred acquired by the Corporation by reason of purchase, conversion
or otherwise shall be reissued, and all such shares shall be cancelled, retired
and eliminated from the shares which the Corporation shall be authorized to
issue.
5. NOTICES. Any notice or other communication under the provisions of
this Certificate shall be in writing, and shall be given by postage prepaid,
first class mail, receipt requested, by hand delivery with an acknowledgement
copy, or by any reputable service which guarantees over night delivery ("Over
Night Mail"), directed to the Corporation at 1160-B South Rogers Circle, Boca
Raton, Florida 33487, and to the Holders at their respective addresses as set
forth in the records of the Corporation, or to any new address of which the
Corporation or any Holder shall have informed the others by the giving of notice
in the manner provided herein. Such notice or communication shall be effective,
if sent by mail, three (3) days after it is mailed within the continental United
States; if sent by Over Night Mail, one day after it is mailed; or by hand
delivery, upon receipt.
3
EXHIBIT 4.7
OPTION TO PURCHASE
80,000 UNITS
PSI INDUSTRIES, INC.
PURCHASE OPTION
DATED: ___________, 1999
THIS CERTIFIES that FAS Wealth Management Services, Inc., 16935 West
Bernardo Drive, Suite 107, San Diego, California 92127 (hereinafter sometimes
referred to as the "Holder"), is entitled to purchase from PSI INDUSTRIES, INC.
(hereinafter referred to as the "Company"), at the prices and during the periods
as hereinafter specified, up to 80,000 Units (the "Units") consisting of one
(1)share of Series C Convertible Preferred Stock, par value $.0001 per share
("Preferred Stock"), and one (1) Series II Redeemable Common Stock Purchase
Warrant ("Warrants"). Each Warrant entitles the registered holder thereof to
purchase one (1) share of Common Stock, par value $.0001 per share ("Common
Stock") at an exercise price of 115% of the closing market price per share of
the Common Stock on the day immediately preceding the proposed offering of the
Preferred Stock. The Warrants (hereinafter, the "Warrants") are exercisable for
a four year period, commencing ________________, 2000 (one (1) year from the
Effective Date). Hereinafter, the Units and the securities underlying the Units,
shall be referred to as "Option Securities" or "Securities."
The Securities have been registered under a Registration Statement on
Form SB-2 (File No. 333-_______) declared effective by the Securities and
Exchange Commission on ___________ (the "Registration Statement"). This Option
(the "Option") to purchase 80,000 Units was originally issued pursuant to an
underwriting agreement between the Company and FAS Wealth Management Services,
Inc. as underwriter (the "Underwriter"), in connection with a public offering of
700,000 Units each consisting of one (1) share of Preferred Stock and one(1)
Series II Warrant (the "Public Securities") through the Underwriter, in
consideration of $100.00 received for the Option.
Except as specifically otherwise provided herein, the Preferred Stock
and the Warrants issued pursuant to this Option shall bear the same terms and
conditions as described under the caption "Description of Securities" in the
Registration Statement, and the Warrants shall be governed by the terms of the
Warrant Agreement dated as of ________________, executed in connection with such
public offering (the "Warrant Agreement"), except that the holder shall have
registration rights under the Securities Act of 1933, as amended (the "Act"),
for the Option, the Units, the Preferred Stock and the Warrants included in the
Units, and the shares of Common Stock underlying the Warrants, as more fully
described in paragraph 6 of this Option. In the event of any reduction of the
exercise price of the Warrants included in the Public Securities, the same
changes to the Warrants included in the Option and the components thereof shall
be simultaneously effected.
1. The rights represented by this Option shall be exercised at the
prices, subject to adjustment in accordance with paragraph 8 of this Option, and
during the periods as follows
(a) Between ____________, 2000 (one (1) year from the
Effective Date) and ____________, 2004, inclusive, the Holder shall
have the option to purchase Units hereunder at an exercise price not
less than 165% of the offering price per unit (subject to adjustment
pursuant to paragraph 8 hereof) (the "Exercise Price").
(b) After ____________, 2004, the Holder shall have no right
to purchase any Option Securities hereunder.
2. The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
of the Exercise Price then in effect for the number of Option Securities
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any; and (iii) delivery to the Company of a duly executed
agreement signed by the person(s) designated in the purchase form to the effect
that such person(s) agree(s) to be bound
<PAGE>
by the provisions of paragraph 6 and subparagraphs (b), (c) and (d) of paragraph
7 hereof. This Option shall be deemed to have been exercised, in whole or in
part to the extent specified, immediately prior to the close of business on the
date this Option is surrendered and payment is made in accordance with the
foregoing provisions of this paragraph 2, and the person or persons in whose
name or names the certificates for shares of Common Stock and Warrants shall be
issuable upon such exercise shall become the holder or holders of record of such
Common Stock and Warrants at that time and date. The Common Stock and Warrants
and the certificates for the Common Stock and Warrants so purchased shall be
delivered to the Holder within a reasonable time, not exceeding ten (10) days,
after the rights represented by this Option shall have been so exercised.
3. This Option shall not be transferred, sold, assigned, or
hypothecated for a period of one (1) year from the Effective Date, 2 except that
it may be transferred to successors of the Holder, and may be assigned in whole
or in part to any person who is an officer of the Holder or selling group member
of the offering during such period. Any transfer after one (1) year must be
accompanied with an immediate exercise of the Option. Any such assignment shall
be effected by the Holder (i) executing the form of assignment at the end hereof
and (ii) surrendering this Option for cancellation at the office or agency of
the Company referred to in paragraph 2 hereof, accompanied by a certificate
(signed by an officer of the Holder if the Holder is a corporation), stating
that each transferee is a permitted transferee under this paragraph 3 hereof;
whereupon the Company shall issue, in the name or names specified by the Holder
(including the Holder) a new Option or Options of like tenor and representing in
the aggregate rights to purchase the same number of Option Securities as are
purchasable hereunder.
4. The Company covenants and agrees that all shares of Preferred Stock
which may be issued as part of the Option Securities purchased hereunder and the
Common Stock which may be issued upon exercise of the Warrants will, upon
issuance, be duly and validly issued, fully paid and nonassessable. The Company
further covenants and agrees that during the periods within which this Option
may be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of its Preferred Stock to provide for the exercise
of this Option and that it will have authorized and reserved a sufficient number
of shares of Common Stock for issuance upon exercise of the Warrants included in
the Option Securities.
5. This Option shall not entitle the Holder to any voting, dividend, or
other rights as a stockholder of the Company.
6. (a) During the period set forth in paragraph l(a) hereof, the
Company shall advise the Holder or its transferee, whether the Holder holds the
Option or has exercised the Option and holds Option Securities or any of the
securities underlying the Option Securities, by written notice at least 30 days
prior to the filing of any post-effective amendment to the Registration
Statement or of any new registration statement or post-effective amendment
thereto under the Act covering any securities of the Company, for its own
account or for the account of others (other than a registration statement on
Form S-4 or S-8 or any successor forms thereto), and will for a period of five
years from the effective date of the Registration Statement, upon the request of
the Holder, include in any such post-effective amendment or registration
statement, such information as may be required to permit a public offering of
the Option, all or any of the Preferred Stock, or Warrants included in the
Securities or the Common Stock issuable upon the exercise of the Warrants (the
"Registrable Securities"). The Company shall supply prospectuses and such other
documents as the Holder may request in order to facilitate the public sale or
other disposition of the Registrable Securities, use 3 its best efforts to
register and qualify any of the Registrable Securities for sale in such states
as such Holder designates provided that the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or execute a general
consent to service of process in any jurisdiction in any action and do any and
all other acts and things which may be reasonably necessary or desirable to
enable such Holders to consummate the public sale or other disposition of the
Registrable Securities, and furnish indemnification in the manner provided in
paragraph 7 hereof. The Holder shall furnish information and indemnification as
set forth in paragraph 7 except that the maximum amount which may be recovered
from the Holder shall be limited to the amount of proceeds received by the
Holder from the sale of the Registrable Securities. The Company shall use its
best efforts to cause the managing underwriter or underwriters of a proposed
underwritten offering to permit the holders of Registrable Securities requested
to be included in the registration to include such securities in such
underwritten offering on the same terms and conditions as any similar securities
of the Company included therein. Notwithstanding the foregoing, if the managing
underwriter or underwriters of such offering advises the holders of Registrable
Securities that the total amount of securities which they intend to include in
such offering is such as to materially and adversely affect the success of such
offering, then the amount of securities to be offered for the accounts of
holders of Registrable Securities shall be eliminated, reduced, or
2
<PAGE>
limited to the extent necessary to reduce the total amount of securities to be
included in such offering to the amount, if any, recommended by such managing
underwriter or underwriters (any such reduction or limitation in the total
amount of Registrable Securities to be included in such offering to be borne by
the holders of Registrable Securities proposed to be included therein pro rata).
The Holder will pay its own legal fees and expenses and any underwriting
discounts and commissions on the securities sold by such Holder and shall not be
responsible for any other expenses of such registration.
(b) If any 50% holder (as defined below) shall give notice to the
Company at any time during the period set forth in paragraph l(a) hereof to the
effect that such holder desires to register under the Act this Option or any of
the underlying securities contained in the Option Securities underlying the
Option under such circumstances that a public distribution (within the meaning
of the Act) of any such securities will be involved then the Company will
promptly, but no later than 60 days after receipt of such notice, file a
post-effective amendment to the current Registration Statement or a new
registration statement pursuant to the Act, to the end that the Option and/or
any of the Securities underlying the Option Securities may be publicly sold
under the Act as promptly as practicable thereafter and the Company will use its
best efforts to cause such registration to become and remain effective for a
period of 120 days (including the taking of such steps as are reasonably
necessary to obtain the removal of any stop 4 order); provided that such holder
shall furnish the Company with appropriate information in connection therewith
as the Company may reasonably request in writing. The 50% holder (which for
purposes hereof shall mean any direct or indirect transferee of such holder)
may, at its option, request the filing of a post-effective amendment to the
current Registration Statement or a new registration statement under the Act
with respect to the Registrable Securities on only two occasions during the term
of this Option. The Holder may at its option request the registration of the
Option and/or any of the securities underlying the Option in a registration
statement made by the Company as contemplated by Section 6(a) or in connection
with a request made pursuant to this Section 6(b) prior to acquisition of the
Securities issuable upon exercise of the Option and even though the Holder has
not given notice of exercise of the Option. The 50% holder may, at its option,
request such post-effective amendment or new registration statement during the
described period with respect to the Option or separately as to the Units and/or
Warrants included in the Option and/or the Common Stock issuable upon the
exercise of the Warrants, and such registration rights may be exercised by the
50% holder prior to or subsequent to the exercise of the Option. Within ten
business days after receiving any such notice pursuant to this subsection (b) of
paragraph 6, the Company shall give notice to the other holders of the Options,
advising that the Company is proceeding with such post-effective amendment or
registration statement and offering to include therein the securities underlying
the Options of the other holders. Each holder electing to include its
Registrable Securities in any such offering shall provide written notice to the
Company within twenty (20) days after receipt of notice from the Company. The
failure to provide such notice to the Company shall be deemed conclusive
evidence of such holder's election not to include its Registrable Securities in
such offering. Each holder electing to include its Registrable Securities shall
furnish the Company with such appropriate information (relating to the
intentions of such holders) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of only one such
post-effective amendment or new registration statement shall be borne by the
Company, except that the holders shall bear the fees of their own counsel and
any underwriting discounts or commissions applicable to any of the securities
sold by them.
The Company shall be entitled to postpone the filing of any
registration statement pursuant to this Section 6(b) otherwise required to be
prepared and filed by it if (i) the Company is engaged in a material
acquisition, reorganization, or divestiture, (ii) the Company is currently
engaged in a self-tender or exchange offer and the filing of a registration
statement would cause a violation of Rule 10b-6 under the Securities Exchange
Act of 1934, (iii) the Company is engaged in an underwritten offering and the
managing underwriter has advised the Company in writing that such a registration
statement would have a material adverse 5 effect on the consummation of such
offering or (iv) the Company is subject to an underwriter's lock-up as a result
of an underwritten public offering and such underwriter has refused in writing,
the Company's request to waive such lock-up. In the event of such postponement,
the Company shall be required to file the registration statement pursuant to
this Section 6(b), within 60 days of the consummation of the event requiring
such postponement.
The Company will use its best efforts to maintain such registration
statement or post-effective amendment current under the Act for a period of at
least six months (and for up to an additional three months if requested by the
Holder) from the effective date thereof. The Company shall supply prospectuses,
and such other documents as the Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities,
use its best efforts to register and qualify any of the Registrable Securities
for sale in such states as such holder
3
<PAGE>
designates, provided that the Company shall not be required to qualify as a
foreign corporation or a dealer in securities or execute a general consent to
service of process in any jurisdiction in any action and furnish indemnification
in the manner provided in paragraph 7 hereof.
(c) The term "50% holder" as used in this paragraph 6 shall mean the
holder of at least 50% of the Preferred Stock and the Warrants underlying the
Option (considered in the aggregate) and shall include any owner or combination
of owners of such securities, which ownership shall be calculated by determining
the number of shares of Common Stock held by such owner or owners as well as the
number of shares then issuable upon exercise of the Warrants.
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to the Option or any shares or warrants issued or issuable upon the
exercise of any Options, is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each holder of the securities covered
by such registration statement, amendment, or supplement (such holder being
hereinafter called the "Distributing Holder"), and each person, if any, who
controls (within the meaning of the Act) the Distributing Holder, and each
underwriter (within the meaning of the Act) of such securities and each person,
if any, who controls (within the meaning of the Act) any such underwriter,
against any losses, claims, damages, or liabilities, joint or several, to which
the Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement or any preliminary prospectus or
final prospectus constituting a part thereof or any amendment or supplement
thereto, or arise out of or are based upon 6 the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse the Distributing Holder and each such
controlling person and underwriter for any legal or other expenses reasonably
incurred by the Distributing Holder or such controlling person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in said registration statement, said
preliminary prospectus, said final prospectus, or said amendment or supplement
in reliance upon and in conformity with written information furnished by such
Distributing Holder or any other Distributing Holder, for use in the preparation
thereof.
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each person,
if any, who controls the Company (within the meaning of the Act) against any
losses, claims, damages, or liabilities, joint and several, to which the Company
or any such director, officer, or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in said registration statement, said preliminary prospectus,
said final prospectus, or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder for
use in the preparation thereof; and will reimburse the Company or any such
director, officer, or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action.
(c) Promptly after receipt by an indemnified party under this paragraph
7 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Paragraph 7.
(d) In case any such action is brought against any 7 indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified
4
<PAGE>
party under this paragraph 7 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof.
8. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Option shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Preferred Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of
Preferred Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Preferred Stock into a smaller
number of shares, the Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date
of such subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of
shares of Preferred Stock outstanding after giving effect to such
action, and the numerator of which shall be the number of shares of
Preferred Stock outstanding immediately prior to such action.
Notwithstanding anything to the contrary contained in the Warrant
Agreement, in the event an adjustment to the Exercise Price is effected
pursuant to this Subsection (a) (and a corresponding adjustment to the
number of Option Securities is made pursuant to Subsection (d) below),
the exercise price of the Warrants shall be adjusted so that it shall
equal the price determined by multiplying the exercise price of the
Warrants by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding immediately after giving effect to
such action and the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action. In such
event, there shall be no adjustment to the number of shares of Common
Stock or other securities issuable upon exercise of the Warrants. Such
adjustment shall be made successively whenever any event listed above
shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock
entitling them to subscribe for or purchase shares of Common Stock (or
securities convertible into Common Stock) at a price (the "Subscription
Price") (or having a conversion price per share) less 8 than the
current market price of the Common Stock (as defined in Subsection (e)
below) on the record date mentioned below, the Exercise Price shall be
adjusted so that the same shall equal the price determined by
multiplying the number of shares then comprising an Option Securities
by the product of the Exercise Price in effect immediately prior to the
date of such issuance multiplied by a fraction, the numerator of which
shall be the sum of the number of shares of Common Stock outstanding on
the record date mentioned below and the number of additional shares of
Common Stock which the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion price of
the convertible securities so offered) would purchase at such current
market price per share of the Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of
Common Stock offered for subscription or purchase (or into which the
convertible securities so offered are convertible). Such adjustment
shall be made successively whenever such rights or warrants are issued
and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or
warrants; and to the extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not
delivered) after the expiration of such rights or warrants the Exercise
Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into Common Stock)
actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets
(excluding cash dividends or distributions and-dividends or
distributions referred to in Subsection (a) above) or subscription
rights or warrants (excluding those referred to in Subsection (b)
above), then in each such case the Exercise Price in effect thereafter
shall be determined by multiplying the number of shares then comprising
an Option Securities by the product of the Exercise Price in effect
immediately prior thereto multiplied by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as
defined in Subsection (e) below), less the fair market value (as
determined by the Company's Board of Directors) of said assets or
evidences of indebtedness so distributed or of such rights or warrants,
and the
5
<PAGE>
denominator of which shall be the total number of shares of Common
Stock outstanding multiplied by such current market price per share of
Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date for the determination of shareholders entitled to receive
such distribution.
(d) Whenever the Exercise Price payable upon exercise of this
Option is adjusted pursuant to Subsections (a), (b) or (c) above, the
number of Option Securities purchasable upon exercise of this Option
shall simultaneously be adjusted by multiplying the number of Option
Securities initially issuable upon exercise of this Option by the
Exercise Price in effect on the date hereof and dividing the product so
obtained by the Exercise Price, as adjusted.
(e) For the purpose of any computation under Subsections (b)
or (c) above, the current market price per share of Common Stock at any
date shall be deemed to be the average of the daily closing prices for
20 consecutive business days before such date. The closing price for
each day shall be the last sale price regular way or, in case no such
reported sale takes place on such day, the average of the last reported
bid and asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is admitted to
trading or listed, or if not listed or admitted to trading on such
exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if
NASDAQ is no longer reporting such information, or if not so available,
the fair market price as determined by the Board of Directors.
(f) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at
least fifteen cents ($0.15) in such price; provided, however, that any
adjustments which by reason of this Subsection (i) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment required to be made hereunder. All calculations
under this Section 8 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this
Section 8 to the contrary notwithstanding, the Company shall be
entitled, but shall not be required, to make such changes in the
Exercise Price, in addition to those required by this Section 8, as it
shall determine, in its sole discretion, to be advisable in order that
any dividend or distribution in shares of Common Stock, or any
subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities convertible into
Common Stock (including Warrants issuable upon exercise of this
Option).
(g) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly, but no later than 10 days after
any request for such an adjustment by the Holder, cause a notice
setting forth the adjusted Exercise Price and adjusted number of Option
Securities issuable upon exercise of this Option and, if requested,
information describing the transactions giving rise to such
adjustments, to be mailed to the Holder, at the address set forth
herein, and shall cause a certified copy thereof to be mailed to its
transfer agent, if any. The Company may retain a firm of independent
certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any
computation required by this Section 8, and a certificate signed by
such firm shall be conclusive evidence of the correctness of such
adjustment.
(h) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Holder thereafter
shall become entitled to receive any shares of the Company, other than
Common Stock, thereafter the number of such other shares so receivable
upon exercise of this Option shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Common Stock contained in
Subsections (a) to (g), inclusive above.
9. This Agreement shall be governed by and in accordance with the laws
of the State of New York.
6
<PAGE>
IN WITNESS WHEREOF, PSI Industries, Inc., has caused this Option to be
signed by its duly authorized officers under its corporate seal, and this Option
to be dated the date first above written.
PSI INDUSTRIES, INC.
By:
---------------------------------
Name:
Title:
(Corporate Seal)
7
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby irrevocably elects
to exercise the purchase rights represented by such Option for, and to purchase
thereunder, _________ Units of PSI Industries, Inc., each Unit consisting of one
(1) Share of Series C Convertible Preferred Stock, $.0001 per value per share,
and one (1) Series II Redeemable Common Stock Purchase Warrant of PSI
Industries, Inc. herewith makes payment of $______________ therefor, and
requests that the certificates for Units be issued in the name(s) of, and
delivered to _________________________ whose address(es) is (are)
_____________________________________________.
Dated:
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and transfers unto
_______________________________ the right to purchase Units of PSI Industries,
Inc., in the numbers set forth below represented by the foregoing Option to the
extent of _____ Units and appoints __________________________ attorney to
transfer such rights on the books of PSI Industries, Inc., with full power of
substitution in the premises.
Dated:_________________________
By:
----------------------------
Address:________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
In the presence of:_______________________________________
8
EXHIBIT 21
SUBSIDIARIES OF PSI INDUSTRIES, INC.
1. Sharp Film Corporation
2. PSI International Limited
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to use in this Registration Statement on Form SB-2 of our
report dated September 22, 1998 except to Note 11 as to which the date is
February 26, 1999, relating to the financial statements of PSI
Industries, Inc. for the years ended December 31, 1997 and 1996, and the
reference to our firm under the caption "Experts" in this Registration
Statement.
/S/ FELDMAN SHERB EHRLICH & CO., P.C.
-------------------------------------
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
New York, New York
March 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 96,388 224,680
<SECURITIES> 0 0
<RECEIVABLES> 4,801,418 4,617,778
<ALLOWANCES> 170,297 138,142
<INVENTORY> 10,173,459 5,774,263
<CURRENT-ASSETS> 15,778,339 10,776,487
<PP&E> 1,743,453 1,571,285
<DEPRECIATION> 278,784 215,784
<TOTAL-ASSETS> 17,497,616 13,137,067
<CURRENT-LIABILITIES> 11,154,238 9,352,552
<BONDS> 621,893 539,878
0 0
20 5
<COMMON> 891 884
<OTHER-SE> 5,738,766 3,240,722
<TOTAL-LIABILITY-AND-EQUITY> 17,497,616 13,137,067
<SALES> 21,029,453 23,976,069
<TOTAL-REVENUES> 0 0
<CGS> 15,857,508 19,179,005
<TOTAL-COSTS> 3,503,974 4,659,638
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 488,690 582,809
<INCOME-PRETAX> 1,179,281 (445,383)
<INCOME-TAX> 309,000 (15,874)
<INCOME-CONTINUING> 870,281 (429,509)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 870,281 (429,509)
<EPS-PRIMARY> 0.09 (0.06)
<EPS-DILUTED> 0.09 (0.06)
</TABLE>
