U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
General Form for Registration of Securities of Small Business Issuers Under
Section 12(b) or 12(g) of the Securities Act of 1934.
PSI INDUSTRIES, INC.
(Name of Small Business Issuer in its Charter)
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<S> <C>
FLORIDA 59-2736501
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
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1160 B SOUTH ROGERS CIRCLE, BOCA RATON, FLORIDA 33487
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(Address of Principal Executive Offices) (Zip Code)
(561) 997-1133
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, .0001 PAR VALUE
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(Title of Class)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
ITEM 1. DESCRIPTION OF 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 products represent a potential one-stop source for the Company's
customers.
The Company has five camera products in the single-use disposable and 35mm
camera industry: (1) The Message Camera(TM) 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(TM) 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 areas within the film-imaging sector. Since its introduction, there has
been dramatic growth in the sales of these cameras, from 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 1998, the Company has
sold approximately 500,000, 1,500,000, and 2,300,000 units, respectively.
In January 1996 the Company became the worldwide licensee, distributor and
manufacturer of The Message Camera(TM) under a licensing arrangement 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(TM) 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. In April 1999, the Company reached a
settlement with Keepsake. 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 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 "DESCRIPTION OF BUSINESS -
Licenses, Patents and Trademarks".
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PRODUCTS.
The Company distributes 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.
There are four types of cameras:
THE MESSAGE CAMERA(TM)/RETAIL. The Message Camera(TM) is a small, compact and
contoured single-use camera, which incorporates a 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(TM) 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(TM) includes the following:
The "Happy Birthday" Message Camera(TM), the "Wedding" Message Camera(TM), the
"Anniversary" Message Camera(TM), the "It's a Boy" Message Camera(TM), the "It's
a Girl" Message Camera(TM), the "Party" Message Camera(TM), the "Vacation"
Message Camera(TM), the "Bible" Message Camera(TM), the "Graduation" Message
Camera(TM), the "Pet Dog" Message Camera(TM), the "Pet Cat" Message Camera(TM),
the "Season's Greetings" Message Camera(TM), the "Baby's First Birthday" Message
Camera(TM), the "Halloween" Message Camera(TM), the "Baby Shower" Message
Camera(TM)", the "Bridal Shower" Message Camera(TM) and the "Hawaii" Message
Camera(TM). 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.
SMILETIME(TM) CAMERAS. The Company's Smiletime(TM) 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(TM) 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.
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 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.
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 Company 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
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
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of 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 Corp.,
and is currently using the name "Sharp Color Film(TM)" imprinted on each
canister of film that is loaded into The Message Cameras(TM) and the
Smiletime(TM) 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 cameras grow and brand awareness is
achieved.
SALES AND MARKETING.
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
catalogue 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.
THE MESSAGE CAMERA(TM). The occasion-specific line of Message Cameras(TM) 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 markets
within their territory. The Company has currently divided the markets 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 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(TM) line. The Message Camera(TM) is also marketed to a wide range of
independent retail stores such as gift and card stores, party stores, airport
hotel and motel gift 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 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(TM) to their corporate clients throughout the world.
The Company believes that The Message Camera(TM) 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.
SMILETIME(TM) CAMERAS. The Company markets its Smiletime(TM) camera line both
through mass catalogue distribution and telemarketing sales as well as through
numerous sales representative organizations that may include the same
representative organizations that market The Message Camera(TM). Most of the
Smiletime(TM) 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
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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 Website for the consumer to directly jump to the Website of
Party City. The Party City Website will direct the consumer to the closest Party
City store location where the Message Camera(TM) is offered for sale.
SIGNIFICANT CUSTOMERS.
During 1997 and 1998, no customer accounted for more than 10% of net sales.
MANUFACTURING AND SUPPLIES.
Management believes that astute purchasing is one of the key ingredients of the
profitability of the Company's 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 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, Agfa, Polaroid and Imation
products.
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(TM). 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(TM) 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
Company serve as the sources of supply for raw color negative film.
The Company currently has its cameras manufactured by three separate sources
located in China and Hong Kong, Achiever Industries, Inc., Vast Fame, Inc. and
Mass Chance Electronics, Inc. ("Mass Chance"). Each of these manufacturers have
been qualified for quality control and dependability. On March 1, 1999 the
Company entered into a three (3) year Manufacturing and Sales Agreement with
Mass Chance. 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
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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.
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
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 is one known competitor, DCC Compact Classics, which has begun to market a
camera similar to The Message Camera(TM). 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 of 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 of 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.
The Company has also applied for trademark registrations for The Message
Camera(TM), Smiletime(TM) and Sharp Color Film(TM).
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EMPLOYEES.
At March 31, 1999, the Company had 35 employees, 11 of whom are engaged in
marketing and sales, 9 in assembly, warehousing and shipping, and 15 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.
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. 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 in
the event that the Company has completed an underwritten public 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. All shares vested as of January 1, 1997.
Effective July 1, 1997, the Company entered into a three-year Employment
Agreement with George Erfurt. Under the 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 $3.00 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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 wholesaler 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
$28,000,000 in 1998. The Company has been profitable throughout these years
except for 1997.
In 1995 management decided 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(TM), 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(TM) camera, a proprietary line of high-quality 35mm
single-use cameras, the Company was able to add products with significantly
higher profit margins and to expand its marketing to other channels of
distribution.
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.
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PERCENTAGE OF REVENUES
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YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31
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1998 1997 1999 1998
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Net Sales 100% 100% 100% 100%
Cost of Sales 77.80% 79.99% 78.81% 79.31%
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Gross Profit 22.20% 20.01% 21.19% 20.69%
Selling, General
and Administrative
Expenses 17.14% 18.27% 15.89% 16.65%
Product Development 0.11% 1.70% 0.82% 0.73%
Non-cash imputed
Compensation
Expense - 15.71% - -
Operating Income (Loss) 4.95% (15.67%) 4.48% 3.31%
Other Expenses:
Interest Expense,
Net of Interest Income 2.24% 2.43% 2.05% 2.09%
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Income (Loss) before
Income taxes 2.71% (18.10%) 2.43% 1.22%
Income Tax Provision
(Benefit) - 0.07% - -
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Net Income (Loss) 2.71% (18.03%) 2.43% 1.22%
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Years ended December 31, 1998 and December 31, 1997
NET SALES:
The Company's net sales for 1998 were $28,278,852 compared to $23,976,069 for
1997, an increase of $4,302,783 or 17.9%. 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
cameras, and penetration of the international markets.
GROSS PROFIT:
Gross profit for 1998 was $6,277,409 compared to $4,797,064 for 1997, an
increase of $1,480,345 or 30.9%. As a percentage of sales, gross profit
increased to 22.2% in 1998 from 20% in 1997. The increase in gross profit as a
percentage of sales is due to several factors. In 1997 there were additional
production startup costs for The Message Camera(TM) and 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(TM). In 1998,
production costs were reduced by changing camera manufacturers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
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Selling, general and administrative expenses for 1998 were $4,846,955 compared
to $4,381,402 for 1997, an increase of $465,553 or 10.6%. As a percentage of
sales, these expenses decreased to 17.1 % in 1998 from 18.3% in 1997. Of the
dollar increase, $816,746 represented increased payroll costs in connection with
the hiring of additional personnel to support the growth in sales, offset by a
decrease of $246,542 in reduced royalties to Polaroid Corporation compared to
royalties paid the previous licensor, and decreases of $57,968 and $64,805 in
rent and selling and marketing expenses respectively. The remaining dollar
increase was attributable to various selling, general and administrative
expenses.
PRODUCT DEVELOPMENT COSTS:
Product Development costs for 1998 were $31,165 compared to $408,486 for 1997, a
decrease of $377,321 or 92.4%. As a percentage of sales, these costs decreased
to .1% in 1998 from 1.7% in 1997.
NON-CASH IMPUTED COMPENSATION EXPENSE:
In 1997 the Company issued Common Stock at below market value as
incentives to employees. The difference of $3,766,566 between the fair market
value of the Company's Common Stock and the price at which such Common Stock was
issued is reflected as non-cash compensation expense.
INTEREST EXPENSE NET OF INTEREST INCOME:
Interest expense net of interest income for 1998 was $633,205 compared to
$582,809 for 1997, an increase of $50,396 or 8.6%. As a percentage of sales,
these expenses decreased to 2.2% in 1998 from 2.4% in 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:
For 1998, the Company did not record a provision for income tax due to the
utilization of the 1997 net operating loss carry forward.
NET INCOME (LOSS):
As a result of the foregoing, net income for 1998 was $766,084 compared to a
loss of $4,362,325 for 1997 an increase of $5,128,409.
TURNOVER RATIOS:
For the year ended 1998, inventory turned two times compared to six times for
the year ended 1997. The decrease in turnover was due primarily to the
acquisition of cameras being held in Hong Kong in anticipation of 1999 camera
sales. Accounts Receivable turned seven times or about every 50 days for the
years ended 1998 and 1997.
INVENTORY:
The inventory at December 31, 1998 was $12,270,811 as compared to $5,774,263 at
December 31, 1997. The increase of $6,496,548 was mainly attributable to the
purchase of 1.5 million camera body units which represents six months
projected sales for 1999. The Company compiled camera bodies in order to ensure
that there was sufficient product to meet anticipated sales for the next six
months.
In order to ensure that the inventory impairments are identified and recorded in
the proper period, management maintains a production reporting system linked to
a perpetual inventory and verified by taking periodic physical inventories.
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Three months ended December 31, 1998
The operating loss for the three months ended December 31, 1998 was primarily
due to the Company's decision to write down The Message Camera(TM) inventory
that used the original imaging process. In 1998, the Company developed a
proprietary imaging process that produced a superior product. In addition, The
Message Camera packaging was redesigned causing the prior packaging to be
dispensed out of inventory.
The decline in product development costs for the three months ended December 31,
1998 was primarily due to the reclassification of media production costs.
Three months ended March 31, 1999 and March 31, 1998
NET SALES:
The Company's net sales for the three months ended March 31, 1999 were
$7,152,084 compared to $6,601,617 for the three months ended March 31, 1998, an
increase of $550,467 or 8.3%. The increase in net sales was primarily
attributable to an increase in the volume from existing ancillary imaging
product customers.
GROSS PROFIT:
Gross profit for the three months ended March 31, 1999 was $1,479,911 compared
to $1,399,024 for the three months ended March 31, 1998, an increase of $80,887
or 5.8%. As a percentage of sales, gross profit decreased to 20.7% for the three
months ended March 31, 1999 from 21.2% for the three months ended March 31,
1998. The decrease in gross profit as a percentage of sales is due to a change
in the product mix, principally a substantial increase in sales of ancillary
imaging products, which carry a smaller profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses for the three months ended March
31, 1999 were $1,190,846 compared to $1,049,307 for the three months ended March
31, 1998, an increase of $141,539 or 13.5%. As a percentage of sales, these
expenses increased to 16.7% for the three months ended March 31, 1999 from 15.9%
for the three months ended March 31, 1998. Of the dollar increase, $52,231
represented increased payroll costs in connection with the hiring of additional
personnel to support the growth in sales, $52,375 represented increased
professional fees in connection with litigation, financing and other corporate
matters, $35,940 represented increased insurance expenses principally as a
result of acquiring Directors & Officers Liability Insurance, offset by a
decrease of $25,067 in advertising and promotion expenses. The remaining dollar
increase was attributable to various selling, general and administrative
expenses.
PRODUCT DEVELOPMENT COSTS:
Product Development costs for the three months ended March 31, 1999 were $51,915
compared to $54,435 for the three months ended March 31, 1998, a decrease of
$2,520 or 4.6%. As a percentage of sales, these costs decreased to .7% for the
three months ended March 31, 1999 from .8% for the three months ended March 31,
1998.
INTEREST EXPENSE NET OF INTEREST INCOME:
Interest expense net of interest income for the three months ended March 31,
1999 was $149,431 compared to $135,056 for the three months ended March 31, 1998
an increase of $14,375 or 10.6%. As a percentage of sales, these expenses
increased to 2.1% for the three months ended March 31, 1999 from 2.0% for the
three months ended March 31, 1998. The dollar increase in interest expense was
attributable to increased borrowings on the line of credit required to finance
the Company's growth.
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<PAGE>
PROVISION FOR INCOME TAXES:
For the three months ended March 31, 1999 and March 31, 1998, the Company did
not record a provision for income taxes due to the utilization of the 1997 net
operating loss carry forward.
NET INCOME:
As a result of the foregoing, net income for the three months ended March 31,
1999 was $87,719 compared to net income of $160,226 for the three months ended
March 31, 1998 a decrease of $72,507.
TURNOVER RATIOS:
For the three months ended March 31, 1999, and March 31, 1998 inventory turned
once every three months. For the three months ended March 31, 1999 Accounts
Receivable turned about every 60 days compared to 75 days for the three months
ended March 31, 1998.
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 March 31, 1999 the interest rate that was in effect was 7.75% and $6,854,279
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.
As of March 31, 1999 the Company had working capital of $5,083,738. Operating
activities used cash of $480,337 primarily due to an increase in accounts
receivable of $2,450,129 which was partially offset by a decrease in inventories
of $722,280 and net income of $87,719. Net cash used in investing activities was
$15,808 reflecting the purchase of certain fixed assets and advances to
stockholders. Financing activities provided cash of $412,574 primarily due to an
increase in the borrowings from the Company's bank credit facility.
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(TM) 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. In this regard, in October 1998, the Company entered into an
agreement with an investment banking firm to act as a placement agent in
connection with a proposed offering of up to $10,000,000 of senior subordinated
debt. As consideration for services rendered by the investment banking firm, the
Company agreed to pay a cash transaction fee of 6% of the gross proceeds, and
all reasonable out of pocket and investors' counsel expenses. In addition, upon
consummation of the financing in an amount of no less than five million dollars,
the Company will pay the investment banker fifty thousand dollars and issue
twenty five thousand shares of the Company's common stock and issue warrants to
purchase shares of the Company's common stock in an amount equal to three
percent of the investment arranged or committed at an exercise price per share
substantially the same as the one issued to investors in the financing. As of
this date, the composition of the units has not been determined. The specific
terms of the debt securities will be subject to negotiation with potential
investors. There can be no assurances that the Company will be successful in
obtaining this additional financing.
10
<PAGE>
In March, 1999, the Company submitted to the Securities and Exchange Commission
a registration statement for the purpose of raising $4,800,000 through the sale
of 800,000 shares of its Series C Preferred stock along with 800,000 Series II
common stock purchase warrants. There can be no assurances that the Company will
be successful in obtaining additional financing in connection with these or any
other financing possibility on terms acceptable to the Company, or at all.
In March, 1999 the Company signed a three year Manufacturing and Sales agreement
with Chendgu Hoist Recording Instrument CO., Ltd. and Mass Chance Electronics
(the "Manufacturing Sales Agreement"), The Company is to receive a $5 million
line of credit to purchase product from Hoist and Mass Chance Electronics.
Credit will be extended based on the interest rate per annum as published by the
Central Bank of China at the time of shipment, plus 10% of the interest rate
added to the published rate. The Company agrees to repay the obligations, 50%,
25% and 25% on each invoiced shipment in 30, 60 and 90 days after U.S. Customs
clearance, respectively. Upon approval by the Board of Directors, as security
for the credit line, the Company will issue, in escrow, an amount of preferred
stock up to a stated value of $5 million. The shares of the newly created series
of preferred stock will be designated as Series D convertible preferred stock.
The preferred stock will be convertible into common stock solely upon any
default in the obligation to Hoist at a conversion price equal to the average
closing bid price of the common stock for the five trading days preceding the
default. The preferred stock may not be assigned, transferred or sold by Hoist
until an event of default occurs with respect to the obligation.
On April 6, 1999, the Company and Keepsake, Inc. entered into a Mediated
Settlement Agreement whereby the Company agreed to pay Keepsake $850,000 within
90 days, subject to, and conditioned upon, the funding of the Company's pending
private placement in an amount not less than $4,000,000. Such payment shall be
in full and final settlement of all claims arising in actions filed in the
Circuit Court of Orange County, Florida, the U.S. District Court for the Middle
District of Florida (Orlando Division) and the Circuit Court of Palm Beach
County, Florida. This settlement included mutual covenants wherein each party
agrees not to litigate against each other, forever, for infringement of their
respective patents relating to imprinting latent images on photographic 35mm
file. In the event the Company does not make payment within 48 hours of receipt
of the funding, Keepsake shall be entitled to a judgment in the amount of
$850,000 upon the filing of an affidavit of nonpayment with notice to
defendants. As a result of this Agreement, the Company will capitalize all costs
and cash payments directly attributable to the use of the Keepsake, Inc.
patents. Of the $850,000 being paid to Keepsake, Inc., $100,000 is being borne
by the Company's product liability insurance company.
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. 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.
ITEM 3. 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
11
<PAGE>
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 the Company's Chief Executive
Officer and his wife. See "CERTAIN RELATIONSHIPS AND RELATED 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.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the Company's
common stock beneficially owned on March 31, 1999, for (i) each shareholder
known by the Company to be the beneficial owner of 5% or more of the Company's
outstanding common stock, (ii) each of the Company's executive officers and
directors, and (iii) all executive officers and directors as a group. In
general, a person is deemed to be a "beneficial owner" of a security if that
person has or shares the power to vote or direct the voting of such security, or
the power to dispose or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which the person has
the right to acquire beneficial ownership within 60 days. At March 31, 1999,
there were 11,600,577 shares of common stock outstanding. The address of each of
the persons set forth below is 1160 B South Rogers Circle, Boca Raton, Florida
33487, except as otherwise noted:
<TABLE>
<CAPTION>
NAME AND ADDRESS NO. OF SHARES OF COMMON STOCK PERCENT OF
OR IDENTITY OF GROUP BENEFICIALLY OWNED BENEFICIAL OWNERSHIP
- -------------------- ------------------ --------------------
<S> <C> <C>
Dominick M. Seminara (1) 2,172,606 18.7%
Benjamin Cohen 1,126,970 9.7%
Mirco Vietti (2) 2,386,605 20.6%
Carol J. Seminara (3) 2,172,606 18.7%
Lisa A. Davidson 838,970 7.2%
Deborah A. Vietti (4) 2,386,605 20.6%
2599 N.W. 63rd Street
Boca Raton, Florida 33496
Richard Proodian 50,000 *
George Erfurt 15,000 *
Nico B.M. Letschert (5) 202,777 1.7%
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 (6) 25,000 *
All Executive Officers and Directors 6,871,928 57.6%
as a Group (9 persons)
12
<PAGE>
<FN>
- -----------------------
* Less than 1%
(1) Includes 984,469 shares held by Carol Seminara, Mr. Seminara's wife, as
to which Mr. Seminara disclaims beneficial ownership.
(2) 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.
(3) Includes 1,188,137 shares held by Dominick Seminara, her husband, as to
which Mrs. Seminara disclaims beneficial ownership.
(4) 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.
(5) 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.
(6) Includes 25,000 shares of Common Stock underlying immediately
exercisable options.
</FN>
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
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
Martin D. Epstein 47 Vice President of Finance and Administration, Chief
Financial Officer 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
<FN>
- ---------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
</FN>
</TABLE>
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.
13
<PAGE>
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. 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.
ITEM 6. EXECUTIVE COMPENSATION.
CASH COMPENSATION.
14
<PAGE>
The following table shows, for the three-year period ended December 31, 1998,
the cash and other compensation paid by the Company to its Chief Executive
Officer and to each of the executive officers of the Company who had annual
compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- ------------------ ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Dominick M. Seminara, 1997 $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 $3,381,816(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)
George Erfurt 1998 $100,000 $0 $50,461(7)
Vice President of Sales 1997 $48,461 $0 $53,370(8)
<FN>
(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 non-cash imputed compensation expense for
shares of restricted stock received by Mr. Cohen.
(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.
(7) Includes $10,580 paid for Mr. Erfurt for an automobile lease and
$39,881 in commissions.
(8) Includes $2,938 for Mr. Erfurt for an automobile lease and $7,682 in
commissions and $42,750 for non-cash imputed compensation expense for
shares of restricted stock received by Mr. Erfurt.
</FN>
</TABLE>
OPTION GRANTS IN THE LAST FISCAL YEAR.
The following table sets forth information with respect to the grant of options
to purchase shares of common stock during the fiscal year ended December 31,
1998, to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF% OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/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
George Erfurt 0 0 0 0
</TABLE>
15
<PAGE>
1996 STOCK OPTION PLAN.
In March of 1996, as amended in January 1999 and February 1999, the Board of
Directors adopted and the shareholders 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, 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.
As of March 31, 1999, 1,431,883 Plan Options had been granted pursuant to the
Plan, all of which were vested as of the date of grant and of which 10,900 Plan
Options had been forfeited by the optionee's termination from employment with
the Company. As of the same date, 1,379,833 options had been exercised.
OPTION EXERCISES AND HOLDINGS.
16
<PAGE>
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 each person named in the Summary Compensation Table and the
unexercised options held as of the end of 1998 fiscal year.
AGGREGATED OPTION/EXERCISES IN
LAST FISCAL YEAR AND 1998 FISCAL YEAR END OPTION/VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS AT 1998 FISCAL IN-THE-MONEY OPTIONS/SARS
ACQUIRED ON REALIZED (1) FISCAL YEAR END (#) AT 1998 FISCAL YEAR END ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ --- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dominick M. Seminara 0 0 None 0
Mirco Vietti 0 0 None 0
Benjamin Cohen 0 0 None 0
George Erfurt 0 0 None 0
<FN>
(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.
</FN>
</TABLE>
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 OF OTHER OTHER PERIOD UNTIL --------------------------------
RIGHTS MATURATION OF THRESHOLD TARGET MAXIMUM
NAME (#) 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
George Erfurt 0 0 0 0 0
</TABLE>
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. 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 in
the event that the Company has completed an underwritten public 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. All shares vested as of January 1, 1997.
Effective July 1, 1997, the Company entered into a three-year Employment
Agreement with George Erfurt. Under the 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 $3.00 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.
17
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED 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 "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 $3.00 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 1997 and 1998, the Company made certain advances and paid certain expenses to
Dominick Seminara, Benjamin Cohen, Mirco Vietti and Lisa Davidson. As of
December 31, 1998, the aggregate of these advances which represent loans payable
to the Company totaled $433,844. The amount of each of these officers' loan
accounts as of December 31, 1998 was $269,840 for Mr. Seminara, $90,448 for Mr.
Cohen, $34,005 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.
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".
ITEM 8. DESCRIPTION OF SECURITIES.
Under the Company's Articles of Incorporation, as amended, the Company is
currently authorized to issue up to 60,000,000 shares of Common Stock, par value
$.0001 per share, of which 11,600,577 shares were outstanding as of March 31,
1999. The Company is also authorized to issue up to 2,500,000 shares of
Preferred Stock, par value $.0001 per share, of which 15,022 shares of Series B
Convertible Preferred Stock were issued and outstanding as of March 31, 1999.
COMMON STOCK.
Each shareholder is entitled to one vote for each share of Common Stock owned of
record. The holders of shares of Common Stock do not possess cumulative voting
rights, which means that the holders of more than 50% of the outstanding shares
voting for the election of directors can elect all of the directors, and in such
event the holders of the remaining shares will be unable to elect any of the
Company's directors. Holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available therefor at such times and
in such amounts as the Board of Directors may from time to time determine. Upon
the liquidation, dissolution, or winding up of the Company, the assets legally
available for distribution to the shareholders will be distributable ratably
among the holders of the shares outstanding at the time. Holders of the shares
of Common Stock have no preemptive, conversion, or subscription rights, and
shares are not subject to redemption. All outstanding shares of Common Stock
will be fully paid and non-assessable.
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PREFERRED STOCK.
Under its Articles of Incorporation, the Company is authorized to issue
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors will be empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the
Company's stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change of control of the Company. Under its authority the Board has
created two series of preferred stock, Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock.
SERIES A CONVERTIBLE PREFERRED STOCK.
On March 31, 1999 the holders of the Series A Convertible Preferred Stock
("Series A Preferred Stock") converted all of the outstanding shares of the
Series A Preferred Stock into 973,334 shares of Common Stock pursuant to an
agreement between the Company and each of the holders of the Series A Preferred
Stock. As consideration for all of the Series A Preferred Stock holders
converting there shares, the Company agreed to reduce the conversion price to
$1.50.
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 33.3 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.
SERIES D CONVERTIBLE PREFERRED STOCK
The Series D Convertible Preferred Stock will be issued in connection with a
manufacturing agreement, subject to Board approval. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations". The holders of
the Series D Convertible Preferred Stock (the "Series D 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
D Preferred Stock is convertible into shares of the Company's Common Stock at a
conversion price equal to the average closing bid price of the Common Stock of
the Company for the five trading days preceding an event of default as defined
in the Manufacturing and Sales Agreement dated March 1, 1999. The shares of
Series D 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 D 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
D 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 $50 per share.
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 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
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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.
CERTAIN FLORIDA LEGISLATION.
Florida has enacted legislation that may deter or frustrate takeovers of Florida
corporations. The Florida Control Share Act generally provides that shares
acquired in excess of certain specified thresholds will not possess any voting
rights, unless such voting rights are approved by a majority vote of a
corporation's disinterested shareholders. The Company has amended its by-laws
and elected not to be governed by the provisions of the Control Share Act.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
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 March 31, 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.
HIGH BID LOW BID
-------- -------
1996
Fourth Quarter $5.12 $4.00
(from September 16, 1996)
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 $2.125 $.875
The closing bid and asked prices of the Company's Common Stock on May 26, 1999
were $.84 and $1.00, respectively, as quoted on the OTC Electronic Bulletin
Board. As of May 26, 1999, there were 71 shareholders of record of the Company's
Common Stock, and approximately 425 beneficial holders of the Common Stock.
The transfer agent for the Company's Common Stock is Florida Atlantic Stock
Transfer, Inc., 7130 Nob Hill Road, Tamarac, Florida 33321.
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.
ITEM 2. LEGAL PROCEEDINGS.
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.
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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.
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
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 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 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. However, the Company does
not believe that the ultimate outcome will have a material effect on the
Company, although there can be no assurance as to this.
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(TM), as well as the Company's
tradename, PSI Industries, Inc. Defendants' responses to the complaint have not
yet been served.
On April 6, 1999, the Company and Keepsake, Inc. entered into a Mediated
Settlement Agreement whereby the Company agreed to pay Keepsake $850,000 within
90 days, subject to, and conditioned upon, the funding of the Company's pending
private placement in an amount not less than $4,000,000. Such payment shall be
in full and final settlement of all claims arising in actions filed in the
Circuit Court of Orange County, Florida, the U.S. District Court for the Middle
District of Florida (Orlando Division) and the Circuit Court of Palm Beach
County, Florida. This settlement included mutual covenants wherein each party
agrees not to litigate against each other, forever, for infringement of their
respective patents relating to imprinting latent images on photographic 35mm
file. In the event the Company does not make payment within 48 hours of receipt
of the funding, Keepsake shall be entitled to a judgment in the amount of
$850,000 upon the filing of an affidavit of nonpayment with notice to
defendants. As a result of this Agreement, the Company will capitalize all costs
and cash payments directly attributable to the use of the Keepsake, Inc.
patents. Of the $850,000 being paid to Keepsake, Inc., $100,000 is being borne
by the Company's product liability insurance company.
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ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
ITEM 4. 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 which
services were valued at $32,600. The shares were issued to the consultant in
September 1996. Such investor was accredited or an otherwise qualified investor
based on its financial resources and knowledge of investments, had access to or
was provided with relevant financial and other information relating to the
Company. Accordingly, 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 which
services were valued at $42,750. 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 canceled 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
canceled in May of 1998. Such investor was accredited or an otherwise qualified
investor based on its financial resources and knowledge of investments, had
access to or was provided with relevant financial and other information relating
to the Company. Accordingly, 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.
Each of such investors were either accredited and/or sophisticated investors,
had pre-existing relationships with members of management of the Company, were
employees or members of management of the Company and/or had access to relevant
information pertaining to the contemplated operations of the Company.
In September 1996, the Company issued 7,900 shares of its Common Stock to a law
firm for legal services rendered which services were valued at $23,700. Such
investor was accredited and/or had a pre-existing relationship with the Company
and had access to relevant information pertaining to the contemplated operations
of the Company. Accordingly, the issuance of the shares was exempt from the
registration requirements of the Act pursuant to either Section 4(2) of the Act.
In January 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. Mr. Cohen
is an officer and director of the Company and therefore 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 1996 stock options granted in 1996.
The Company received exercise proceeds of $9,000. Such employees had a
pre-existing relationship with the Company and had access to relevant
information pertaining to the contemplated
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operations of the Company. Therefore, 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 which services were valued at $120,000.
Such investor was accredited and had a pre-existing relationship with the
Company and had access to relevant information pertaining to the contemplated
operations of the Company. Accordingly, 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 which services were
valued at $2,250. Such investor was accredited or an otherwise qualified
investor based on its financial resources and knowledge of investments, had
access to or was provided with relevant financial and other information relating
to the Company. Accordingly, 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 granted in 1996. Such employees had a pre-existing relationship
with the Company and had access to relevant information pertaining to the
contemplated operations of the Company. Therefore, 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 October 1997, the Company issued 183,167 shares of its Common Stock to
Dominick M. Seminara, the Chief Executive Officer of the Company, 183,166 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 1996 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. Each of the investors, as officers and directors of the
Company, had pre-existing relationships with the Company and had access to
relevant information pertaining to the contemplated operations of the Company.
Therefore, 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 $3.00 per share from Mr. Erfurt. Such
employee had a pre-existing relationship with the Company and had access to
relevant information pertaining to the contemplated operations of the Company.
Therefore, 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 services were valued at $15,000. Such
investor was accredited and/or had a pre-existing relationship with the Company
and had access to relevant information pertaining to the contemplated operations
of the Company. Therefore 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 for aggregate proceeds of $1,387,644. The
offering was conducted pursuant to Rule 506 of Regulation D of the Act. All of
such investors were accredited or otherwise qualified investors based on their
financial resources and knowledge of investments, had access to or were provided
with relevant financial and other information relating to the Company. 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, granted in 1996 and 1997, at per share
prices ranging
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from $.10 to $3.00. Such employees had a pre-existing relationship with the
Company and had access to relevant information pertaining to the contemplated
operations of the Company. Therefore, 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. Such investor was
accredited and had a pre-existing relationship with the Company and had access
to relevant information pertaining to the contemplated operations of the
Company. Therefore, 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. All of such investors were accredited or
otherwise qualified investors based on their financial resources and knowledge
of investments, had access to or were provided with relevant financial and other
information relating to the Company. 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 which services were valued at $22,500. Such investor
was accredited or an otherwise qualified investor based on its financial
resources and knowledge of investments, had access to or was provided with
relevant financial and other information relating to the Company. Therefore, 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 services were
valued at $27,730. Such investors were accredited and/or had a pre-existing
relationship with the Company and had access to relevant information pertaining
to the contemplated operations of the Company. Therefore, 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 valued at $300,000 and to be rendered pursuant to a financial
advisory agreement. Such investor was accredited or an otherwise qualified
investor based on its financial resources and knowledge of investments, had
access to or was provided with relevant financial and other information relating
to the Company. Therefore, 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 at $1.00 per share to six investors for net proceeds of $875,000.
The shares were issued pursuant to Rule 504 of Regulation D of the Act. All of
such investors were accredited or otherwise qualified investors based on their
financial resources and knowledge of investments, had access to or were provided
with relevant financial and other information relating to the Company.
In January 1999, the Company issued 641,500 shares of its Common Stock to five
employees in connection with the exercise of stock options. The Company received
proceeds of $576,375.
In March 1999, the Company issued 200 shares of its Common Stock to one employee
in connection with the exercise of stock options. The Company received proceeds
of $50.
In January 1999, the Company issued 641,500 shares of its Common Stock to five
employees in connection with the exercise of stock options. The Company received
proceeds of $576,375,
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In March 1999, the Company issued 200 shares of its Common Stock to one employee
in connection with the exercise of stock options. The Company received proceeds
of $50.00.
In March 1999, the Company issued an aggregate of 973,334 shares of Common Stock
to nine investors in conversion of their Series A Convertible Preferred Stock at
a conversation price of $1.50 per share. All of such investors were accredited
or otherwise qualified investors based on their financial resources and
knowledge of investments, had access to or were provided with relevant financial
and other information relating to the Company. Therefore, the issuance of the
shares was exempt from the registration requirements of the Act pursuant to
Section 3(a)(9) of the Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act (the "Corporation Act") permits the
indemnification of directors, employees, officers and agents of Florida
corporations. The Company's Articles of Incorporation (the "Articles") provides
as follows:
ARTICLE IX - INDEMNIFICATION
"The Corporation shall indemnify any registered agent, officer, director or
incorporator, or any form of registered agent, officer or director, to the full
extent permitted by law."
In addition, the Company's by-laws provides as follows:
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
SECTION 5.01.
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
(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, or 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 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
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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.
(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:
27
<PAGE>
(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;
(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;
28
<PAGE>
(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 corporation would have the power to
indemnify him against such liability under the provisions of this section.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
29
<PAGE>
PART III
ITEM 2. INDEX TO EXHIBITS.
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
1.1 Form of Underwriting Agreement [1.1] (2)
2 Articles of Merger [2] (1)
3.1 Form of Amended and Restated Articles of
Incorporation [3.1] (20)
3.2 By-Laws, as amended [3.6] (1)
4.2 Form of Warrant Certificate [4.2] (1)
4.4 Form of Series B Preferred Stock Certificate
[4.4] (1)
4.5 Form of Series C Preferred Stock Certificate (2)
4.7 Form of Underwriters' Purchase Option [4.7] (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)
10.8 Consulting Agreement between Registrant and Stedman
Walker dated August 26, 1998(1)
10.9 Financial Advisory Agreement between Registrant and
Merit Capital Associates, Inc. dated October 1, 1998(1)
10.10 Manufacturing & Sales Agreement between Registrant,
Chengdu Hoist Recording Instrument Co., Ltd. and
Mass Chance Electronics dated March 26, 1999(1)
21 List of Subsidiaries of the Company [21] (2)
27.1 Financial Data Schedule*
* 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) Incorporated by reference to the exhibit number indicated as filed with the
Company's Registration Statement on Form SB-2 (File No. 333-74111) as filed
with the Commission on March 9, 1999.
30
<PAGE>
PART F/S
PSI INDUSTRIES, INC.
INDEX
PAGE
----
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
<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, 1998, and 1997, the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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, 1998, and 1997, 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
February 26, 1999
except for note 10
as to which the
date is April 6, 1999
<PAGE>
PSI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------ ------------------------------
1999 1998 1997
------------ ------------ ------------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 192,416 $ 275,987 $ 224,680
Accounts receivable, net of allowance for doubtful
accounts of $247,780 in 1999, $217,415 in 1998
and $138,142 in 1997 5,516,563 3,096,434 4,479,636
Inventories 11,474,821 12,270,811 5,774,263
Deferred income taxes 194,324 194,324 25,708
Prepaid expenses and other current assets 1,172,982 1,108,178 272,200
------------ ------------ ------------
Total current assets 18,551,106 16,945,734 10,776,487
Notes receivable from and advances to related parties 467,574 458,787 380,613
Property and equipment, net 1,374,577 1,400,653 1,355,501
Other assets 633,950 528,802 624,466
------------ ------------ ------------
Total assets $ 21,027,207 $ 19,333,976 $ 13,137,067
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 6,163,230 $ 4,849,882 $ 1,984,426
Accrued expenses 291,921 233,620 241,460
Line of credit 6,854,279 6,425,413 7,103,984
Notes payable 124,610 303,320 --
Current portion of long-term notes payable 33,328 33,328 22,682
------------ ------------ ------------
Total current liabilities 13,467,368 11,845,563 9,352,552
Deferred income taxes 194,324 194,324 25,708
Long-term notes payable 623,685 632,152 517,196
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value - 60,000,000 shares
authorized, 11,600,777, 9,985,743 and 8,836,943 shares issued
and outstanding in 1999, 1998 and 1997, respectively 1,160 999 884
Convertible Preferred Stock - Series A, $.0001 par value,
70,000 shares authorized, 48,667 shares issued and
outstanding in 1998 and 1997, $1,460,010 liquidation value 0 5 5
Convertible Preferred Stock - Series B, $.001 par value,
20,000 shares authorized, 15,022 shares issued and
outstanding in 1999 and 1998, $1,502,200 liquidation value 15 15 --
Additional paid-in capital 9,629,045 9,052,777 6,346,665
Stock subscription receivable (605,747) (39,747) (60,747)
Accumulated deficit (2,282,643) (2,352,112) (3,045,196)
------------ ------------ ------------
Total stockholders' equity 6,741,830 6,661,937 3,241,611
------------ ------------ ------------
Total liabilities and stockholders' equity $ 21,027,207 $ 19,333,976 $ 13,137,067
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
PSI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 7,152,084 $ 6,601,617 $ 28,278,852 $ 23,976,069
Cost of sales 5,672,173 5,202,593 22,001,443 19,179,005
------------ ------------ ------------ ------------
Gross profit 1,479,911 1,399,024 6,277,409 4,797,064
Selling, general and administrative expenses 1,190,846 1,049,307 4,846,955 4,381,402
Product development costs 51,915 54,435 31,165 408,486
Non-cash imputed compensation expense -- -- -- 3,766,586
------------ ------------ ------------ ------------
Operating income (loss) 237,150 295,282 1,399,289 (3,759,410)
Other expenses:
Interest expense, net of interest income (149,431) (135,056) (633,205) (582,809)
------------ ------------ ------------ ------------
Income (loss) before income taxes 87,719 160,226 766,084 (4,342,219)
Income tax provision (benefit) -- -- -- (15,874)
------------ ------------ ------------ ------------
Net income (loss) $ 87,719 $ 160,226 $ 766,084 $ (4,326,345)
Cumulative preferred stock dividend 18,250 18,250 73,000 18,965
------------ ------------ ------------ ------------
Net income (loss) to common stockholders $ 69,469 $ 141,976 $ 693,084 $ (4,345,310)
============ ============ ============ ============
Net income (loss) per common share - basic $ 0.01 $ 0.02 $ 0.08 $ (0.54)
============ ============ ============ ============
Net income (loss) per common share - diluted $ 0.01 $ 0.01 $ 0.07 $ (0.54)
============ ============ ============ ============
Weighted average number of common shares - basic 10,546,818 8,841,721 9,085,384 7,990,778
============ ============ ============ ============
Weighted average number of common shares - diluted 10,579,204 9,911,080 9,972,237 7,990,778
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PSI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
--------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 7,767,610 $ 777 -- $ --
Purchase of treasury stock (1,164,470) (116) -- --
Issuance of 1,164,470 shares of common stock in
connection with an employment agreement 1,164,470 116 -- --
Issuance of Preferred Stock-Series A, net of
issuance costs of $72,733 -- -- 48,667 5
Issuance of common stock for cash 156,000 16 -- --
Issuance of common stock for services 397,000 40 -- --
Issuance of common stock for subscription
receivable 516,333 51 -- --
Preferred stock dividends
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 8,836,943 884 48,667 5
Issuance of Preferred Stock-Series B for inventory -- -- 15,022 15
Issuance of common stock for cash 1,078,300 108 -- --
Issuance of common stock for services 120,500 12 -- --
Cancellation of common stock (50,000) (5) -- --
Payment of stock subscription receivable -- -- -- --
Preferred stock dividends -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 9,985,743 $ 999 63,689 $ 20
Issuance of common stock for cash 1,700 -- -- --
Issuance of common stock for subcription
receivable 640,000 64 -- --
Preferred stock dividends -- -- -- --
Conversion of Preferred Stock Series A 973,334 97 (48,667) (5)
Net income -- -- -- --
----------- ----------- ----------- -----------
Balance at March 31, 1999 11,600,777 $ 1,160 15,022 $ 15
=========== =========== =========== ===========
<CAPTION>
ADDITIONAL STOCK TOTAL
PAID - IN SUBSCRIPTION RETAINED STOCKHOLDERS'
CAPITAL RECEIVABLE EARNINGS EQUITY
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 989,494 $ -- $ 1,300,094 $ 2,290,365
Purchase of treasury stock (174,554) -- -- (174,670)
Issuance of 1,164,470 shares of common stock in
connection with an employment agreement 3,493,294 -- -- 3,493,410
Issuance of Preferred Stock-Series A, net of
issuance costs of $72,733 1,387,639 -- -- 1,387,644
Issuance of common stock for cash 58,334 -- -- 58,350
Issuance of common stock for services 189,762 -- -- 189,802
Issuance of common stock for subscription
receivable 402,696 (60,747) -- 342,000
Preferred stock dividends (18,965) (18,965)
Net loss -- -- (4,326,325) (4,326,325)
----------- ----------- ----------- -----------
Balance at December 31, 1997 6,346,665 (60,747) (3,045,196) 3,241,611
Issuance of Preferred Stock-Series B for inventory 1,502,185 -- -- 1,502,200
Issuance of common stock for cash 858,404 -- -- 858,512
Issuance of common stock for services 350,518 -- -- 350,530
Cancellation of common stock (4,995) -- -- (5,000)
Payment of stock subscription receivable -- 21,000 -- 21,000
Preferred stock dividends -- -- (73,000) (73,000)
Net income -- -- 766,084 766,084
----------- ----------- ----------- -----------
Balance at December 31, 1998 $ 9,052,777 $ (39,747) $(2,352,112) $ 6,661,937
Issuance of common stock for cash 424 -- -- 424
Issuance of common stock for subcription
receivable 575,936 (566,000) -- 10,000
Preferred stock dividends -- -- (18,250) (18,250)
Conversion of Preferred Stock Series A (92) -- -- --
Net income -- -- 87,719 87,719
----------- ----------- ----------- -----------
Balance at March 31, 1999 $ 9,629,045 $ (605,747) $(2,282,643) $ 6,741,830
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PSI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 87,719 $ 160,226 $ 766,084 $(4,326,325)
----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 30,000 27,000 154,000 116,000
Depreciation 33,096 27,000 126,095 76,500
Loss on disposal of asset -- -- -- 3,693
Deferred income taxes -- -- -- (15,874)
Issuance of common stock for services -- -- 350,530 189,801
Non cash imputed compensation expense -- -- -- 3,878,160
Changes in operating assets and liabilities:
Accounts receivable (2,450,129) (846,044) 1,229,202 (2,913,824)
Notes receivable -- -- -- (300,047)
Inventories 722,280 247,331 (5,267,258) 945,194
Prepaid expenses and other current assets (64,804) 45,962 (835,978) 65,819
Other assets (105,148) 250,685 368,574 (452,462)
Accounts payable 1,313,348 1,203,303 2,865,456 (1,627,260)
Notes payable (105,000) -- 303,320 --
Accrued expenses 58,301 (119,701) (7,840) 114,758
----------- ----------- ----------- -----------
Total adjustments (568,056) 835,536 (713,899) 80,458
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN )
OPERATING ACTIVITIES (480,337) 995,762 52,185 (4,245,867)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,021) (100,738) (65,158) (407,055)
Proceeds from disposal of property and equipment -- -- -- 15,900
Advances to stockholders (8,787) (9,009) (78,174) --
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (15,808) (109,747) (143,332) (391,155)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(payments to) line of credit, net 428,866 (375,476) (678,571) 3,248,955
Proceeds from issuance of common and preferred stock,
net of issuance costs 10,425 698 874,512 1,403,244
Principal payments on borrowings (8,467) (7,801) (550,487) (14,514)
Proceeds from borrowings -- -- 570,000 --
Distributions to stockholders (18,250) (18,250) (73,000) (18,965)
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 412,574 (400,829) 142,454 4,618,720
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (83,571) 485,186 51,307 (18,302)
CASH AT BEGINNING OF PERIOD 275,987 224,680 224,680 242,982
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 192,416 $ 709,866 $ 275,987 $ 224,680
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PSI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- ----------------------------
Supplemental disclosures of cash flow information: 1999 1998 1998 1997
----------- ----------- ----------- ------------
(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
=========== =========== =========== ===========
Purchase of equipment for a note payable $ -- $ -- $ 106,089 $ -
=========== =========== =========== ===========
Purchase of common stock in exchange for notes receivable
from and advances to related parties $ -- $ -- $ -- $ 174,670
=========== =========== =========== ===========
Issuance of common stock for imputed compensation
corporation expense $ -- $ -- $ -- $ 3,878,160
=========== =========== =========== ===========
Issuance of common stock for services $ -- $ -- $ 350,530 $ 189,802
=========== =========== =========== ===========
Issuance of common stock for subscriptions receivable $ 626,000 $ -- $ -- $ 402,696
=========== =========== =========== ===========
Reduction of stock receivable for services related to
issuance of common stock $ -- $ -- $ 21,000 $ -
=========== =========== =========== ===========
Purchase of inventory for preferred stock $ -- $ 1,502,200 $ 1,502,200 $ -
=========== =========== =========== ===========
Sale of inventory for payment of note payable $ 73,710 $ -- $ -- $ -
=========== =========== =========== ===========
Interest paid $ 151,610 $ 143,759 $ 661,682 $ 598,675
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PSI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
The consolidated balance sheet at March 31, 1999 and the consolidated statements
of operations and cash flows for the three months ended March 31, 1999 and 1998
and the consolidated statement of stockholders' equity for the three months
ended March 31, 1999 are unaudited but include all adjustments which are in the
opinion of management, 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 and ancillary
photographic equipment 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 average method or market.
D. PROPERTY AND EQUIPMENT - Property and Equipment are carried at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the asset which range from 5 to 30 years.
E. 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.
F. PRODUCT DEVELOPMENT COSTS - Costs related to the design and
development of The
F-7
<PAGE>
Message Camera are expensed as incurred.
G. INCOME TAXES - 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.
H. 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.
I. 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 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.
In May 1999, effective the date of the Company's public offering, the
Company declared a one for three reverse stock split of the issued and
outstanding common stock. The financial statements for all periods
presented have been adjusted to reflect such split.
J. RECENT ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 130, "reporting Comprehensive Income" ("SFAS 130"), and
No. 131, Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 establishes standards for reporting
and displaying comprehensive income, its components and accumulated
balances. SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual
financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the
public. Both SFAS 130 and SFAS 131 are effective for periods beginning
after December 15, 1997. The Company adopted these new accounting
standards in 1998, and their adoption had no effect on the Company's
financial statements and disclosures.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS - The respective carrying value
of certain on-balance-sheet financial instruments approximated their
fair values. Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information
F-8
<PAGE>
available to management. These financial instruments include cash,
accounts receivable, accounts payable and accrued expenses. Fair values
were assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying
amounts approximate fair values or they are receivable or payable on
demand. The fair value of the Company's long-term debt, which
approximates its carrying value, is estimated based upon the quoted
market prices for the same or similar debt instruments or on the
current rates offered to the Company for debt of the same remaining
maturities.
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
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, 1998 and 1997, accounts receivable include two
customers and one customer representing 25% and 18%, respectively,
whose balance exceeds 10% of aggregate accounts receivable.
4. INVENTORIES
At, December 31, 1998 and 1997, inventories are comprised of the
following:
1998 1997
----------- -----------
Raw materials $ 1,497,808 $ 1,147,599
Finished goods 10,773,003 4,626,664
----------- -----------
$12,270,811 $ 5,774,263
=========== ===========
5. PROPERTY AND EQUIPMENT
At, December 31, 1998 and 1997, property and equipment is comprised of
the following:
1998 1997
---------- ----------
Building and building
improvements $ 849,557 $ 844,320
Machinery and equipment 488,715 484,583
Furniture and fixtures 332,892 173,044
Vehicles 71,368 69,338
---------- ----------
1,742,532 1,571,285
Less: Accumulated
depreciation 341,879 215,784
---------- ----------
$1,400,653 $1,355,501
========== ==========
F-9
<PAGE>
6. LINE OF CREDIT
On September 15, 1998, the Company entered into a new credit agreement
with a bank, which replaced the existing line of credit. The new
agreement of up to $12,000,000 provides for borrowings based on a
percentage of eligible accounts receivable and inventory. 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(7.75% at December 31, 1998). 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. The
credit facility terminates on September 15, 2001 and shall
automatically renew from year to year.
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%
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-10
<PAGE>
7. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Mortgage note, payable monthly with interest
at 8% with a balloon payment of $497,344 due on
December 16, 2003, collateralized by building
and building improvements and guaranteed by
the Chief Executive Officer and his wife $ 570,000 $ --
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 -- 539,878
Leased equipment $ 95,480 --
--------- ---------
665,480 539,878
Less current maturities (33,328) (22,682)
--------- ---------
$ 632,152 $ 517,196
========= =========
</TABLE>
Maturities on long-term debt are as follows:
1999 $ 33,328
2000 35,278
2001 35,954
2002 37,177
2003 523,743
---------
$ 665,480
=========
8. RELATED PARTY TRANSACTIONS
On January 1, 1997, in connection with the issuance of shares under an
employment agreement (Note 10) certain stockholders' sold 1,164,740
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.
F-11
<PAGE>
For the year ended December 31, 1998 the Company had approximately
$4,500,000 of sales to an affiliate of the holder of its Series B
Convertible Preferred Stock for which the Company received payment in
inventory which remains at year end. In addition the Company had
approximately $2,000,000 of purchases from such affiliate for the year.
As of December 31, 1998, the Company had notes receivable and advances
to related parties, due on demand, totaling $458,787. The Company does
not intend to demand repayment prior to January 1, 2000.
9. INCOME TAXES
The components of the income tax provision for the year ended December
31, 1998 and 1997 is as follows:
1998 1997
------------- --------------
Current $ - $ -
Deferred - (15,874)
============= ==============
Total $ - $ (15,874)
============= ==============
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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 49,060 $ 49,587
Allowance for doubtful accounts 78,932 51,983
Uniform inventory capitalization 66,332 61,332
Deferred tax assets 194,324 162,902
Less valuation allowance -- (137,194)
--------- ---------
Total deferred tax assets 194,324 25,708
Deferred tax liabilities:
Fixed assets (194,324) (25,708)
--------- ---------
Total deferred tax liabilities (194,324) (25,708)
--------- ---------
Total net deferred taxes 44$$$$ $ -- $ --
========= =========
</TABLE>
F-12
<PAGE>
The reconciliation of the income tax computed at the U.S. federal
statutory rate to income tax expense for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Tax at federal statutory rate 34.00 % (34.00)%
State taxes, net of federal tax benefit - (3.32)
Utilization of Net Operating Loss Carryforward (34.00) -
Nondeductible items - 2.95
Valuation allowance - 30.80
--------- ---------
Total - (3.57)%
========= =========
</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, 1998, the Company has available net operating loss carryforwards of
approximately $130,000 which expire in the year 2012.
10. COMMITMENTS
OPERATING LEASES
The Company leases vehicles and office equipment under noncancelable
operating leases expiring in various years through 2003. The leases
require the Company to pay maintenance, taxes and insurance. Future
minimum rental commitments under long-term noncancelable operating
leases are as follows:
Year ending December 31,
1999 $ 126,721
2000 92,580
2001 65,739
2002 54,684
2003 31,918
-------------
$ 371,642
=============
F-13
<PAGE>
During the years ended December 31, 1998 and 1997, rent expense was
$55,478 and $110,384 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 31,1998 and 1997, raw material
inventory totaling approximately $273,000 and $434,000, respectively,
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 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 1998 and
1997, the Company incurred royalty expense to Polaroid of approximately
$281,000 and $27,000 respectively, of which $70,741 and $27,000 is
included in trade accounts payable at December 31, 1998 and 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
F-14
<PAGE>
salary shall increase to $250,000 per year. In addition, the Company
issued to this officer 1,164,470 shares of common stock, which vested
on January 1, 1997.
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. He is also
entitled to options based upon certain performance standards being met.
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 defendant in an action filed in the U.S. District
Court for the Middle District of Florida (Orlando Division) in November
1998 by eepsake, Inc. and Laura Dobbs. The other defendants are
Wallgreen Company, Party City 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 (TM), as well as the Company's
tradename, PSI Industries, Inc. Defendants' responses to the complaint
have not yet been served.
On April 6, 1999, the Company and Keepsake, Inc. entered into a
Mediated Settlement Agreement whereby the Company agreed to pay
Keepsake $ 850,000 within 90 days, subject to, and conditioned upon the
funding of the Company's pending private placement in an amount not
less than $ 4,000,000. Such payment shall be in full and final
settlement of all claims arising in actions filed in the Circuit Court
of Orange County, Florida, the U.S. District Court for the Middle
District of Florida (Orlando Division) and the Circuit Court of Palm
Beach County, Florida and shall entitle the Company to imprint latent
images on photographic 35mm film without infringing on Keepsake's
current or pending patents. In the event the Company does not make
payment within 48 hours of receipt of funding, Keepsake shall be
entitled to a judgement in the amount of $ 850,000 upon the filing of
an affidavit with notice to defendants.
F-15
<PAGE>
In June of 1998, the Company commenced an action against Jonathan
Barash, a former employee. In this 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,
enjoining him from using, communicating, disclosing, disseminating and
misappropriating any documents, information or computer records as well
as any trade secret information. He is also enjoined from soliciting
and contacting the Company's customers, distributors and sales
representatives and from competing with the Company through and
including May 9, 1999 and must return all originals and copies of the
Company's documents and computer records.
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 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.
11. 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, 1998 and 1997, no contributions were made to this plan
12. STOCKHOLDERS' EQUITY
In January 1997, the Company issued 1,164,470 shares of its Common
Stock to its President, Benjamin Cohen. The stock was issued pursuant
to the terms of an employment agreement.
In April 1997, the Company issued 90,000 shares of its Common Stock to
four employees in connection with the exercise of 1996 stock options.
The Company received proceeds of $9,000.
In June 1997, the Company issued 40,000 shares of its Common Stock to
two attorneys for legal services rendered.
In July 1997, the Company issued 15,000 shares of its Common Stock to a
consultant in consideration for consulting services rendered.
In August 1997, the Company issued 30,000 shares of its Common Stock to
two
F-16
<PAGE>
employees for a purchase price of $.10 per share in connection with the
exercise of stock options
In October 1997, the Company issued 183,167 shares of its Common Stock
to both its Chief Executive Officer and its Executive Vice President,
and 30,000 shares of its Common Stock to a former officer, in
connection with the exercise of 1996 stock options. Both current
officers paid $.11 per share and the former officer paid $.10 per share
by delivery of promissory notes.
In December 1997, the Company issued 15,000 shares of its Common Stock
to its Vice President of Sales, in connection with the exercise of
stock options. The Company received $3.00 per share.
In December 1997, the Company issued 5,000 shares of its Common Stock
to an accountant for professional services rendered which were not
related to the auditing of the Company's financial statements.
In December 1997, the Company issued 335,000 shares to a consultant for
services rendered, of which 285,000 have been delivered and 50,000
shares were cancelled in May of 1998.
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 $1,460,010.
The Series A Convertible preferred stock provides for payment of
semiannual cash dividends of 5% per annum ($73,000 and $18,695 for the
years ended December 31, 1998 and 1997 respectively). Each share of
Series A Convertible preferred stock is convertible at the option of
the holder into twenty shares of the Company's common stock, $.0001 par
value, equivalent to a price of $1.50 per share of common stock.
At any time after one year from the date of issuance, the 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
F-17
<PAGE>
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 202,777 shares of common stock to the placement agent. The
warrants are exercisable at $1.50 per share after December 30, 1998 and
prior to December 30, 2003.
In the period from September 1997 through May 1998, the Company issued
176,800 shares of its Common stock to eleven employees and one former
employee in connection with their exercise of 1996 and 1997 stock
options at per share prices ranging from $.10 to $3.00
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 holders of the Series B Convertible Preferred Stock do
not have any voting rights and do not receive any dividends. Each share
of Series B Convertible Preferred Stock is convertible into 33.3 shares
of Common Stock at any time.
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 $100.00 per share.
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 a
private placement.
In September 1998, the Company issued 7,500 shares to a public
relations firm, for services to be rendered.
In September 1998, the Company issued an aggregate of 15,000 shares to
two accountants in return for professional services to be rendered
which were not related to the auditing of the Company's financial
statements.
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.
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.
13. STOCK OPTION PLAN
On March 15, 1996, the Company established the PSI Industries, Inc.
1996 Stock Option Plan (the "Plan"). The Plan was amended January 1999
and February 1999. Under the Plan, the Company has reserved 3,500,000
shares of Common Stock for issuance
F-18
<PAGE>
pursuant to options granted under the Plan.
From July 1, 1997 through December 31, 1997 the Company granted options
to its employees to purchase 144,050 shares of its common stock at an
exercise price of $3.00 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.
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 1998 and 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 income
(loss) for 1998 and 1997 is not materially different from amounts
reported.
As of December 31, 1998, 759,383 options have been granted, all of
which were vested at the date of grant and of which 4,200 have been
forfeited by the optionee's termination from employment with the
Company. As of the same date, 740,633 options had been exercised.
F-19
<PAGE>
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended
December 31
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net (loss) income $ 766,084 $(4,326,345)
Dividend on Series A preferred stock 73,000 (18,965)
----------- -----------
Numerator for basic and diluted earnings (loss)
per share-income available to common stockholders $ 693,084 $(4,345,310)
----------- -----------
Denominator:
Denominator for basic earnings (loss) per
share-weighted average shares
outstanding 9,085,384 7,990,778
Effect of dilutive securities
Options 8,005 --
Warrants 128,480 --
Preferred Stock 750,368 --
----------- -----------
Denominator for diluted earnings (loss) per
share-adjusted weighted average and assumed
conversions 9,781,764 7,990,778
----------- -----------
Basic earnings (loss) per share $ 0.07 $ (0.54)
----------- -----------
Diluted earnings (loss) per share $ 0.07 $ (0.54)
----------- -----------
</TABLE>
F-20
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
PSI INDUSTRIES, INC.
Date: MAY 28, 1999 BY: /S/BENJAMIN COHEN
---------------------------
Benjamin Cohen, President
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 DEC-31-1998
<CASH> 192,416 275,987
<SECURITIES> 0 0
<RECEIVABLES> 5,764,343 3,313,849
<ALLOWANCES> 247,780 217,415
<INVENTORY> 11,474,821 12,270,811
<CURRENT-ASSETS> 18,551,106 16,945,734
<PP&E> 1,749,553 1,742,532
<DEPRECIATION> 374,976 341,879
<TOTAL-ASSETS> 21,027,207 19,333,976
<CURRENT-LIABILITIES> 13,467,368 11,845,563
<BONDS> 623,685 632,152
0 0
15 20
<COMMON> 1,160 999
<OTHER-SE> 6,740,655 6,660,918
<TOTAL-LIABILITY-AND-EQUITY> 21,027,207 19,333,976
<SALES> 7,152,084 28,278,852
<TOTAL-REVENUES> 0 0
<CGS> 5,672,173 22,001,443
<TOTAL-COSTS> 1,242,761 4,878,120
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 149,431 633,205
<INCOME-PRETAX> 87,719 766,084
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 87,719 766,084
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 87,719 766,084
<EPS-BASIC> 0.01 0.08
<EPS-DILUTED> 0.01 0.07
</TABLE>
