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.
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(Name of Small Business Issuer in its Charter)
FLORIDA 59-2736501
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
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.
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GENERAL.
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PSI Industries, Inc. (the "Company") is engaged in the wholesale
distribution and manufacture of cameras, photographic film, certain
internationally branded cameras and ancillary photographic equipment nationwide
to wholesale and retail businesses. Since its formation in 1986, the Company has
evolved into a major national wholesale distribution company to over 20,000
specialty retail and mass market merchandise outlets and wholesalers.
The Company estimates that the market for cameras, film, and ancillary
photographic equipment is in excess of $75 billion annually and is projected to
enjoy steady growth as reported in the 1997 PMA Consumer Photographic Survey.
The Company markets and distributes its products to a market comprised of
photographic retailers, independent gift boutiques, sundry shops, convenience
stores, pharmacies, mass marketers, and other similar retailers and wholesalers.
The Company's product lines represent distinct market segments for these
customers, and often represent a potential one-stop source for the Company's
customers of the products that the Company distributes.
The Company's camera products consist of five segments of the
single-use disposable and 35mm camera industry: (1) The Message Camera(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 segments within the film-imaging sector. Since its introduction,
there has been dramatic growth in the sales of the cameras, from sales of less
than 1 million units in 1988 to in excess of 270 million units worldwide in 1997
with 84 million units sold in the United States. In 1996, 1997, and through
September 30, 1998, the Company has sold approximately 500,000, 1,500,000, and
2,300,000 units, respectively.
In January of 1996 the Company became the worldwide licensee,
distributor and manufacturer of The Message Camera(TM) under a licensing
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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. 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".
PRODUCTS.
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ANCILLARY IMAGING DIVISION. The Company's Ancillary Imaging Division is
--------------------------
the distribution of branded cameras, photographic film, ancillary photographic
equipment and other proprietary photographic products. Among the products sold
are amateur film, cameras, batteries, travel supplies, albums, photo
accessories, mini-lab supplies and camera accessories. Among the brand names
sold by the Company are Kodak, Fuji, Konica, Keystone, Agfa, Polaroid, Duracell,
Sony, Canon, Olympus, Ricoh and Minolta, to name a few.
CAMERA DIVISION. The Camera Division is divided into four profit
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centers.
THE MESSAGE CAMERA(TM)/RETAIL. The Message Camera(TM) is a small,
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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), "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
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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
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cameras or 35mm cameras prepared and designed specifically for the mass-market
retailers requiring a competitively priced high-quality product under their own
corporate image.
The Camera Division currently has cameras manufactured on a
sub-contract basis in the People's Republic of China and Hong Kong using its
camera requirements. These manufacturers are some of the world's foremost
single-use and 35mm camera manufacturers. Currently most of the product line of
35mm cameras manufactured by the Company are newly constructed. There is,
however, an on-going supply of recycled camera casings, which, from time to
time, the Company remanufactures and recycles for its own proprietary single-use
camera line. The advantage to the use of 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
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Corp., and is currently using the name "Sharp Color Film(TM)" imprinted on each
canister of film and 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 Camera Division grow and brand awareness is achieved.
SALES AND MARKETING.
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ANCILLARY IMAGING DIVISION. The Company distributes its ancillary
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imaging products to independent specialty retailers and regional chains, which
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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
market segments within their territory. The Company has currently divided the
segments into mass merchandise retailers and independent gift retailers. The
mass merchandise retailers include all drug, grocery and convenience store
chains, discount stores and wholesale clubs. The Company focuses its marketing
in this market segment on the top 141 retailers and has selected experienced
sales representative organizations to market this product. Several mass market
merchandisers including Walgreens, Toys-R-Us, K-Mart, American Stores, CVS and
Party City already carry The Message Camera(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 as part of its ancillary imaging business 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 which have increased significantly in the first nine months of 1998 are to
independent specialty retailers, tobacco, sundry, and health and beauty aid
wholesalers.
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PRIVATE LABEL/LOGO CAMERAS. The Private Label/Logo camera line is
--------------------------
currently marketed by a number of the independent sales representative
organizations. This line of cameras is overseen by the Company's Vice President
of Sales who is responsible for marketing the line to mass retailers and
regional chains. Among these retailers and wholesalers are K-Mart, Family Dollar
Stores and Bergen Brunswig Company (distributors to approximately 2,200
independent drug stores). The Company has recently been appointed the exclusive
vendor for private label/logo cameras for Cardinal Health, Inc., which services
2,500 retail pharmacies nationwide.
SIGNIFICANT CUSTOMERS.
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During 1996 and 1997, no customer accounted for more than 10% of net
sales.
MANUFACTURING AND SUPPLIES.
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ANCILLARY IMAGING AND CAMERA DIVISION. Management believes that astute
-------------------------------------
purchasing is one of the key ingredients of the profitability of the Company's
ancillary imaging division business. Brand name film and photographic supplies
are purchased from what management perceives to be the best available sources
based on price and availability. Certain sources represent brand name, high
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. During fiscal 1997, approximately 18% of the Company's total
purchases of ancillary imaging products were from Eastman Kodak.
The Company maintains an inventory of its product in its 18,000 sq. ft.
facility at its corporate headquarters in Boca Raton, Florida. The Company also
maintains inventory in the People's Republic of China and Hong Kong at its
manufacturing sources.
MESSAGE CAMERAS(TM). The Company has recently developed its own
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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.
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The Company currently has its cameras manufactured by three separate
sources located in China and Hong Kong, Achieva Industries, Inc., Vast Frame,
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 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.
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There are a number of distributors and wholesalers of photographic
supplies and equipment that actively compete with the Company. In some areas,
competition is directly with the manufacturers of these products. Many of these
companies have substantially greater financial, technical and other resources
than the Company and have established reputations for success in the
development, licensing and sale of their products and technology. Some of the
Company's direct competitors in its ancillary imaging and camera business
include Unique Photo, Concord Camera Corporation and Jazz Photo Corp. Unique is
a reseller of photo supplies and single-use cameras. Concord and Jazz market
cameras only and not other ancillary imaging products, as is the case with the
Company. Although select areas of price competition is intense in the Company's
ancillary imaging and camera business, the Company believes that it has certain
competitive advantages by virtue of its proprietary product lines, its
well-developed relationships with vendors and broad customer base allowing it to
provide a one-stop source of products for its customers.
There 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
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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.
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POLAROID LICENSE. Effective November 1, 1997 the Company entered into a
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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).
EMPLOYEES.
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At February 1, 1999, the Company had 36 employees, 10 of whom are
engaged in marketing and sales, 10 in assembly, warehousing and shipping, and 16
in management and administration. The Company's employees are not represented by
a collective bargaining unit. The Company considers relations with its employees
to be good.
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. 388,156 shares vested as of
January 1, 1997, and the remaining shares vested pro rata on a monthly basis
over the period from February 1, 1997, through January 1, 1999. "Vesting" means
the time when certain forfeiture restrictions in connection with the Shares
lapse.
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 $.15 per share, which he
subsequently exercised in 1997. He is also entitled to additional options based
upon certain performance standards of the Company's sales of one-time-use
cameras.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
GENERAL.
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The Company was organized in 1986 to engage in the wholesale
distribution of branded cameras, photographic film, ancillary photographic
equipment and other proprietary photographic products. Since its formation, the
Company has evolved into a major national wholesale distribution company to over
20,000 specialty retailers, mass market merchandisers and wholesalers. Since
1987, the Company's revenues have increased on an annual basis from $1,000,000
to approximately $34,000,000 in 1994 and $19,000,000 in 1995. The Company has
been profitable throughout these years. The decline in revenues in 1995
reflected primarily a strategic decision by management to focus its distribution
efforts on higher margin products.
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 added a Camera Division as an independent
profit center. The development of the Camera Division enabled the Company not
only to add products with significantly higher profit margins but also allowed
the Company to expand its marketing to other channels of distribution. Due
primarily to the market penetration of its Camera Division which achieved sales
of approximately $10,000,000 in 1997, the Company's revenues for 1997 increased
to approximately $24,000,000 compared with approximately $14,000,000 in 1996.
RESULTS OF OPERATIONS.
- - ----------------------
The following table sets for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's Statements of
Operations.
PERCENTAGE OF REVENUES
----------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of Sales 79.99% 75.62% 75.41% 74.13%
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Gross Profit 20.01% 24.38% 24.59% 25.87%
Selling, General and Administrative Expenses 17.73% 17.91% 16.32% 18.66%
Product Development Costs 1.70% 2.96% 0.34% 0.72%
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Operating Income 0.58% 3.51% 7.93% 6.49%
Other Expenses: 2.43% 2.09% 2.32% 2.39%
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Interest expense, net of interest income
Income (Loss) before Income Taxes (1.85%) 1.42% 5.61% 4.10%
Income Tax Provision (Benefit) (0.07%) 0.36% 1.47% 1.48%
------- ------ ------ ------
Net income (loss) (1.78%) 1.06% 4.14% 2.62%
======= ======= ====== ======
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</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996.
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NET SALES. The Company's net sales for 1997 were $23,976,069 compared
---------
to $14,055,252 in 1996, an increase of $9,920,817 or 70.6%. The increase in net
sales was primarily attributable to a full year of sales for the Message(TM)
Camera which was introduced in late 1996 and an increase in the customer base.
GROSS PROFIT. Gross profit for 1997 was $4,797,064 compared to
------------
$3,426,576 in 1996, an increase of $1,370,488 or 40%. As a percentage of sales,
gross profit decreased to 20% in 1997 from 24.4% in 1996. Several factors
accounted for the decrease in 1997 in gross profit as a percentage of net sales
over the prior year. These included additional production start-up costs for the
Message Camera(TM), primarily the development of point of purchase displays,
increased freight charges, reflecting the Company's need to employ air freight
to acquire adequate camera inventory to meet the demand for the Message
Camera(TM), increase in cost of sales in the Company's Ancillary Imaging
Division over the prior year and a change in the product mix with increased
sales in 1997 of film which carries small profit margins.
Gross profit for the three months ended December 31, 1997 as a
percentage of sales was 5.87% as compared to 25.87% for the nine months ended
September 30, 1997. The decrease was primarily due to a change in the product
mix with increased sales of film which carry a small profit margin and a
twenty-five cent ($.25) pricing adjustment made by our camera manufacturer for
all shipments received in 1997 and recorded in the three months ended December
31, 1997.
The operating loss of $968,226 for the three months ended December 31,
1997 as primarily due to the decrease in the gross profit percentage to 5.87%
and incurred non-recurring one time expenses relating to research and
development costs for the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
--------------------------------------------
administrative expenses for 1997 were $4,251,152 compared to $2,517,044 in 1996,
an increase of $1,734,108 or 68.9%. As a percentage of sales, these expenses
decreased to 17.7% in 1997 from 17.9% in 1996. Of the dollar increase, $662,280
represented increased commissions and royalties due to higher sales, $337,085
represented increased payroll costs in connection with the hiring of additional
personnel to support the growth in sales, $194,801 primarily represented
increased professional fees in connection with litigation, financing and other
corporate matters, $181,000 represented increased amortization and depreciation
expenses due primarily to the increased product and development costs and
$115,289 represented increased trade show costs. The remaining increase was
attributable to additional selling, general and administrative expenses.
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PRODUCT DEVELOPMENT COSTS. Product development costs for 1997 were
-------------------------
$408,486 compared to $416,177 for 1996, a decrease of $7,691 or 1.8%. As a
percentage of sales, these costs decreased to 1.7% in 1997 from 3% in 1996.
INTEREST EXPENSE NET OF INTEREST INCOME. Interest expense net of
---------------------------------------
interest income for 1997 was $582,809 compared to $293,217 in 1996, an increase
of $289,592 or 98.8%. As a percentage of sales, these expenses increased to 2.4%
in 1997 from 2.1% in 1996. The dollar increase in interest expense was
attributable to increased borrowings on the line of credit required to finance
the Company's growth.
PROVISION FOR INCOME TAXES. For 1997 the Company recorded a tax benefit
--------------------------
of $15,874 due to a net operating loss for the year.
NET INCOME (LOSS). As a result of the foregoing, the Company posted a
------------------
net loss of $429,509 in 1997 compared to net income of $149,463 in 1996, a
decrease of $578,972.
TURNOVER RATIOS. For the years 1997 and 1996, inventory turned six
---------------
times per year, or an average of every two months. Accounts receivable turned
seven times for the year ended 1997 compared to eight times for the year ended
1996.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997.
- - ------------------------------------------------------------
NET SALES. The Company's net sales for the nine months ended September
---------
30, 1998 were $21,029,453 compared to $17,025,282 for the nine months ended
September 30, 1997, an increase of $4,004,171 or 23.5%. The increase in net
sales was primarily attributable to an increase in the volume from existing
customers, securing new mass merchandise and independent gift retailers for the
Company's Camera Division products, and penetration of the international
markets.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1998
------------
was $5,171,945 compared to $4,404,702 for the nine months ended September 30,
1997, an increase of $767,243 or 17.4%. As a percentage of sales, gross profit
decreased to 24.6% for the nine months ended September 30 1998 from 25.9% for
the nine months ended September 30, 1997. The decrease in gross profit as a
percentage of sales was due to a change in the product mix, principally a
substantial increase in sales of Kodak cameras which carry a small profit
margin, and an increase in freight charges arising out of the incurrence of
additional air freight expenses that were necessary to obtain adequate product
to meet the substantial growth in sales of the Company's Camera Division
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
--------------------------------------------
administrative expenses for the nine months ended September 30, 1998 were
$3,432,734 compared to $3,176,898, for the nine months ended September 30, 1997
an increase of $255,836 or 8.1%. As a percentage of sales, these expenses
decreased to 16.3% for the nine months ended September 30, 1998 from 18.7% for
the nine months ended September 30, 1997. Of the dollar increase, $476,161
represented increased payroll costs in connection with the hiring of additional
personnel to support the growth in sales, offset by a decrease of $188,603 in
advertising, marketing and promotion expenses, and a decrease of $215,180 in
reduced royalties to Polariod Corporation compared to royalties paid the
previous licensor. The remaining dollar increase was attributable to various
selling, general and administrative expenses.
11
<PAGE>
PRODUCT DEVELOPMENT COSTS. Product development costs for the nine
-------------------------
months ended September 30, 1998 were $71,240 compared to $122,152 for the nine
months ended September 30 1997, a decrease of $50,912 or 41.7%. As a percentage
of sales, these costs decreased to .34% for the nine months ended September 30,
1998 from .72% for the nine months ended September 30, 1997.
INTEREST EXPENSE NET OF INTEREST INCOME. Interest expense net of
---------------------------------------
interest income for the nine months ended September 30,1998 was $488,690
compared to $407,372 for the nine months ended September 30, 1997, an increase
of $81,318 or 20%. As a percentage of sales, these expenses decreased to 2.3 %
for the nine months ended September 30, 1998 from 2.4% for the nine months ended
September 30, 1997. The dollar increase in interest expense was attributable to
increased borrowings on the line of credit required to finance the Company's
growth.
PROVISION FOR INCOME TAXES. Provision for income taxes for the nine
--------------------------
months ended September 30, 1998 was $309,000 compared to $251,381 for the nine
months ended September 1997, an increase of $57,619. The effective tax rate
decreased to 25.8% for the nine months ended September 30, 1998 from 36% for the
nine months ended September 30, 1997 due to the Company's utilization of its net
operating loss carry forward from the prior year.
NET INCOME (LOSS). As a result of the foregoing, net income for the
-----------------
nine months ended September 30, 1998 was $870,281 compared to net income of
$446,899 for the nine months ended September 30, 1997, an increase of $423,382.
This represents an increase in net income as a percentage of net sales to 4.1%
for the nine months ended September 30, 1998 from 2.6% for the nine months ended
September 30, 1997.
TURNOVER RATIOS. For the nine months ended September 30, 1998,
---------------
inventory turned two times compared to three times for the nine months ended
September 30, 1997. Accounts receivable turned four times for the nine months
ended September 30, 1998 compared to six times for the nine months ended
September 30, 1997. The decrease in turnover was due primarily to an increase in
the customer base who were given extended terms.
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 the
acquisition of inventory during 1998.
The Company's bank credit facility currently permits borrowings of up
to $12,000,000 against a fixed percentage of eligible accounts receivable and
inventory. The interest rate on the line is at the financial institutions prime
rate or the LIBOR rate plus 225 basis points. The amount borrowed under the
credit facility varies based on the Company's cash requirements. The credit
facility is collateralized by substantially all of the assets of the Company. As
of September 30, 1998 the interest rate that was in effect was 8.25% and
$7,103,984 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.
12
<PAGE>
As of September 30, 1998, the Company had working capital of
$4,624,100. Operating activities provided cash of $132,526 primarily due to
increases in accounts receivable and inventories of $214,485 and $2,896,996
respectively, which were partially offset by net income of $872,281. Net cash
used in investing activities was $108,197, reflecting the purchase of certain
fixed assets and investments in patents. Net cash used in financing activities
was $152,631, consisting primarily of payments to the Company's bank credit
facility.
Subsequent to September 30, 1998, the Company raised $875,000 through
sales to private investors of an aggregate number of 975,000 shares of its
Common Stock pursuant to a private offering under Rule 504 of Regulation D of
the Securities Act of 1933, as amended. The proceeds were used primarily for
working capital.
The Company is not currently generating sufficient working capital to
fund its projected expansion of operations. The Company believes that to create
a substantial increase in sales of the Message Camera(TM) product line, it will
be necessary to commence a national advertising campaign. In addition, expansion
of operations will require capital infusions to fund purchase of inventory and
to meet the Company's working capital needs. Accordingly, the Company is
actively exploring several possibilities of raising additional capital through
the issuance of its securities. In this regard, in October 1998 the Company
entered into an agreement with Dabney Flanigan, LLC, 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. 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 additional
financing in connection with this, or any other, financing possibility on terms
acceptable to the Company, or at all.
On March 9, 1999, the Company filed a Registration Statement on Form
SB-2 (File No. 333-74111) pursuant to which the Company is offering 800,000
Unites at a price of $6.00 per unit.
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 and net incomes 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, loss of key
executives, among other things.
13
<PAGE>
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 December 1998 with a new bank mortgage in the
principal sum of $570,000 payable over a term of five years and bearing interest
at the rate of 8% per annum. The mortgage has been guaranteed by Dominick
Seminara and his wife. See "CERTAIN 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 April 12, 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 April
12, 1999, there was 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) 2,175,606 18.8%
Benjamin Cohen 1,126,970 9.7%
Mirco Vietti (2) 2,386,605 20.6%
Carol J. Seminara (3) 2,175,606 18.8%
Lisa A. Davidson 870,970 7.5%
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS NO. OF SHARES OF COMMON STOCK PERCENT OF
OR IDENTITY OF GROUP BENEFICIALLY OWNED BENEFICIAL OWNERSHIP
- - -------------------- ------------------ --------------------
<S> <C> <C>
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 6,287,928 57.9%
as a Group (9 persons)
<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 1,051,137 shares held by Dominick Seminara, her husband, as to
which Mrs. Seminara disclaims beneficial ownership.
(4) Includes 1,201,725 shares held by Mirco Vietti, her husband, as to
which Mrs. Vietti disclaims beneficial ownership and 183,166 shares
held jointly with her husband.
</FN>
</TABLE>
15
<PAGE>
(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.
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 ofthe 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.
16
<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
17
<PAGE>
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.
- - ------------------
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.
18
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- - ------------------ ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Dominick M. Seminara, 1998 $198,683 $ 0 $ 16,160(1)
Chief Executive Officer 1997 $154,356 $ 0 $ 0
1996 $126,226 $ 0 $ 41,216(2)
Benjamin Cohen, 1998 $160,119 $ 0 $ 23,695(3)
President and Chief 1997 $136,462 $ 0 $111,594(4)
Operating Officer
Mirco Vietti, 1998 $177,742 $ 0 $ 15,161(5)
Executive Vice President 1997 $129,320 $ 0 $ 0
1996 $119,846 $ 0 $ 44,979(6)
<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 deferred compensation of shares of restricted
stock received by Mr. Cohen that vested during 1997.
(5) Includes $15,161 paid for Mr. Vietti for an automobile lease and
related costs in 1998.
(6) Includes $29,228 in 1996 representing dividends distributed while the
Company was a Subchapter S corporation. Also includes $15,751 paid for
Mr. Vietti for an automobile lease and related costs in 1996.
</FN>
</TABLE>
OPTION GRANTS IN THE LAST FISCAL YEAR.
- - --------------------------------------
The following table sets forth information with respect to the grant of
options to purchase shares of common stock during the fiscal year ended December
31, 1998, to each person named in the Summary Compensation Table.
19
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE OR
UNDERLYING GRANTED TO BASE PRICE
OPTIONS/SARS EMPLOYEES IN ($/SHARES) EXPIRATION
NAME GRANTED (#) FISCAL YEAR DATE
---- ----------- ----------- ----
<S> <C> <C> <C> <C>
Dominick M. Seminara 0 0 0 0
Benjamin Cohen 0 0 0 0
Mirco Vietti 0 0 0 0
</TABLE>
1996 STOCK OPTION PLAN.
- - -----------------------
In March of 1996, as amended in January 1999 and February 1999, the
Board of Directors adopted and the 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
20
<PAGE>
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 April 12, 1999, 1,428,783 Plan Options had been granted
pursuant to the Plan, all of which were vested as of the date of grant and of
which 2,100 Plan Options had been forfeited by the optionee's termination from
employment with the Company. As of the same date, 1,379,633 options had been
exercised.
OPTION EXERCISES AND HOLDINGS.
- - ------------------------------
The following table sets forth information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended
December 31, 1998, to each person named in the Summary Compensation Table and
the unexercised options held as of the end of 1998 fiscal year.
21
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/ EXERCISES IN
LAST FISCAL YEAR AND 1998 FISCAL YEAR END OPTION/VALUES
-------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS/
UNEXERCISED OPTIONS SARS AT 1998 FISCAL
AT 1998 FISCAL YEAR YEAR END ($)
END (#) EXERCISABLE/ EXERCISABLE/
SHARES ACQUIRED ON VALUE UNEXERCISABLE UNEXERCISABLE
EXERCISE REALIZED (1)
NAME (#) ($)
---- ------------------- ------------ -------------------- -------------------
<S> <C> <C> <C> <C>
Dominick M. Seminara 0 0 None 0
Mirco Vietti 0 0 None 0
Benjamin Cohen 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>
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
------------------------------------------------------
NUMBER OF SHARES, PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
UNITS OR OTHER OTHER PERIOD UNTIL NON-STOCK PRICE-BASED PLANS
RIGHTS MATURATION OR ------------------------------
(#) PAYOUT THRESHOLD TARGET MAXIMUM
NAME ($ OR #) ($ OR #) ($ OR #)
---- ---------------- ----------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Dominick M. Seminara 0 0 0 0 0
Benjamin Cohen 0 0 0 0 0
Mirco Vietti 0 0 0 0 0
</TABLE>
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
22
<PAGE>
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. 388,156 shares vested as of
January 1, 1997, and the remaining shares shall vest pro rata on a monthly basis
over the period from February 1, 1997, through January 1, 1999. "Vesting" means
the time when certain forfeiture restrictions in connection with the Shares
lapse. As of December 1, 1998, 22,832 shares remain unvested. These forfeiture
restrictions include termination of Mr. Cohen's employment for cause, his death
or his disability, as defined in the Agreement.
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 $.15 per share, which he
subsequently exercised in 1997. He is also entitled to additional options based
upon certain performance standards of the Company's sales of one-time-use
cameras.
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 $.15 per share. The
purchase price for the redeemed shares was paid by the Company's forgiveness and
cancellation of the promissory note to Photoline Partners and the forgiveness of
the sum of $36,572 of advances due to the corporation by the Shareholders.
In 1996 and 1997, the Company made certain advances and paid certain
expenses to Dominick Seminara, Benjamin Cohen, Mirco Vietti and Lisa Davidson.
As of December 31, 1997, the aggregate of these advances which represent loans
payable to the Company totalled $362,681. The amount of each of these officers'
loan accounts as of December 31, 1997 was $152,462 for Mr. Seminara, $86,698 for
Mr. Cohen, $83,970 for Mr. Vietti, and $39,551 for Mrs. Davidson. Although the
loans are due on demand, the Company does not currently intend to demand
repayment prior to January 1, 1999.
23
<PAGE>
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 April
12, 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 April 12, 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.
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
24
<PAGE>
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.
25
<PAGE>
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.
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 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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <S> <C> <C>
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
</TABLE>
The closing bid and asked prices of the Company's Common Stock on
April 12, 1999 were $1.25 and $1.375, respectively, as quoted on the OTC
Electronic Bulletin Board. As of April 12, 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.
27
<PAGE>
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. 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.
28
<PAGE>
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. 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.
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 cancelled in October 1996. In December 1997, in
connection with settlement of the dispute with the consultant, the Company
issued 335,000 shares to the consultant, of which 285,000 have been delivered
and 50,000 shares were cancelled in May of 1998. 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.
29
<PAGE>
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 comtemplated 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 April 1997, the Company issued 90,000 shares of its Common Stock to
four employees in connection with the exercise of stock options. The Company
received exercise proceeds of $9,000. 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 June 1997, the Company issued 40,000 shares of its Common Stock to
two attorneys for legal services rendered which services were valued at $6,000.
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. 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 August 1997, the Company issued 1,164,470 shares of its Common Stock
to its President, Benjamin Cohen. The shares were issued pursuant to the terms
of an employment agreement entered into with Mr. Cohen on January 1, 1997. 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 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 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 $.15 per share from Mr.
Erfurt. Such employee had a pre-existing relationship with the Company and had
access to relevant information pretaining 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.
30
<PAGE>
In December 1997, the Company issued 5,000 shares to an accountant in
return for professional services rendered which services were valued at $750.
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. 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 at per share prices ranging from
$.10 to $.25. 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
$9,540. Such investor was accedited 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 $19,080. 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 $127,200 and to be rendered pursuant to a
financial advisory agreement. Such investor was accedited 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 to six investors for aggregate 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.
31
<PAGE>
In November 1998, the Company issued an aggregate of 92,000 shares to
two investors in its 1997 preferred stock private offering in conversion of
their shares of Series A Convertible Preferred Stock into shares of Common
Stock. 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.
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. 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
32
<PAGE>
exceeding, in the judgment of the board of directors, the
estimated expense of litigating the proceeding to conclusion,
actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good
faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation, except that no
indemnification shall be made under this subsection in respect of
any claim, issue, or matter as to which such person shall have
been adjudged to be liable unless, and only to the extent that,
the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that,
despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall
deem proper.
(3) To the extent that a director, officer, employee, or
agent of the corporation has been successful on the merits or
otherwise in defense of any proceeding referred to in subsections
(1) or (2), or in defense of any claim, issue, or matter therein,
he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith.
(4) Any indemnification under subsections (1) or (2), unless
pursuant to a determination by a court, shall be made by the
corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer,
employee, or agent is proper in the circumstances because he has
met the applicable standard of conduct set forth in subsections
(1) or (2). Such determination shall be made:
(a) By the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such
proceeding;
(b) If such a quorum is not obtainable or, even if
obtainable, by majority vote of a committee duly designated by the
board of directors (in which directors who are parties may
participate) consisting solely of two or more directors not at the
time parties to the proceeding;
(c) By independent legal counsel:
(i) Selected by the board of directors prescribed
in paragraph (a) or the committee prescribed in paragraph (b); or
(ii) If a quorum of the directors cannot be
obtained for paragraph (a) and the committee cannot be designed
under paragraph (b), selected by majority vote of the full board
of directors (in which directors who are parties may participate);
or
33
<PAGE>
(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:
(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.
34
<PAGE>
(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:
35
<PAGE>
(a) The term "other enterprises" includes employee
benefit plans;
(b) The term "expenses" includes counsel fees, including
those for appeal;
(c) The term "liability" includes obligations to pay a
judgment, settlement, penalty, fine (including an excise tax
assessed with respect to any employee benefit plan), and expenses
actually and reasonably incurred with respect to a proceeding;
(d) The term "proceeding" includes any threatened,
pending, or completed action, suit or other type of proceeding,
whether civil, criminal, administrative, or investigative and
whether formal or informal;
(e) The term "agent" includes a volunteer;
(f) The term "serving at the request of the corporation"
includes any service as a director, officer, employee, or agent of
the corporation that imposes duties on such persons, including
duties relating to an employee benefit plan and its participants
or beneficiaries; and
(g) The term "not opposed to the best interest of the
corporation" describes the actions of a person who acts in good
faith and in a manner he reasonably believes to be in the best
interests of the participants and beneficiaries of an employee
benefit plan.
(12) The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the corporation or is or
was serving at the request of the corporation as a director,
officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the 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.
36
<PAGE>
PART F/S
The financial statements and supplementary data are included herein.
FINANCIAL STATEMENTS AND EXHIBITS.
- - ----------------------------------
The following audited financial statements for the Company, including
the audited balance sheet at December 31, 1997 and the related audited
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1997 and the
unaudited balance sheet at September 30, 1998 and the related unaudited
statements of operations, changes in stockholders' equity, and cash flows for
each of the nine months ended September 30, 1998 and September 30, 1997.
PSI INDUSTRIES, INC.
CONTENTS
--------
PAGE
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
37
<PAGE>
PSI INDUSTRIES, INC.
REPORT ON AUDIT OF CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of
PSI Industries, Inc.
We have audited the accompanying consolidated balance sheets of PSI
Industries, Inc. (the "Company") as of December 31, 1997, and 1996, the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
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, 1997, and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ FELDMAN SHERB EHRLICH & CO., P.C.
-------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
September 22, 1998
except for Note 11
as to which the
date is February 26, 1999
F-2
<PAGE>
PSI INDUSTRIES, INC.
--------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
September 30, December 31,
--------------------- ------------------------
1998 1997 1996
--------------------- ------------ ----------
ASSETS (Unaudited)
- - ------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 96,388 $ 224,680 $ 242,982
Accounts receivable, net of allowance for doubtful
accounts of $170,297 in 1998, $138,142 in 1997
and $107,659 in 1996 4,631,121 4,479,636 1,681,812
Inventories 10,173,459 5,774,263 6,719,457
Deferred income taxes 25,708 25,708 67,295
Prepaid expenses and other current assets 450,069 272,200 338,019
Notes receivable from and advances to related parties 401,594 -- --
------------ ------------ -----------
Total current assets 15,778,339 10,776,487 9,049,565
Notes receivable from and advances to related parties -- 380,613 255,236
Property and equipment, net 1,464,669 1,355,501 338,084
Investment in H & G Venture, Inc. -- -- 706,455
Deferred income taxes -- -- 27,123
Other assets 254,608 624,466 172,003
------------ ------------ -----------
Total assets $ 17,497,616 $ 13,137,067 $10,548,466
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
-----------
CURRENT LIABILITIES:
Trade accounts payable $ 3,605,392 $ 1,984,426 $ 3,611,687
Accrued expenses 587,720 241,460 126,702
Line of credit 6,917,226 7,103,984 3,855,029
Current portion of long-term notes payable 43,900 22,682 26,841
------------ ------------ -----------
Total current liabilities 11,154,238 9,352,552 7,620,259
Deferred income taxes 25,708 25,708 110,292
Long-term notes payable 577,993 517,196 527,550
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value - 20,000,000 shares
authorized,8,910,743, 8,836,943 and 7,767,610 shares issued
and outstanding in 1998, 1997 and 1996, respecti891y 884 777
Convertible Preferred Stock - Series A, $.0001 par value,
200,000 shares authorized, 48,667 shares issued and
outstanding, $1,460,010 liquidation value 5 5 --
Convertible Preferred Stock - Series B, $.001 par value,
20,000 shares authorized, 15,022 shares issued and
outstanding, $1,502,200 liquidation value 15 -- --
Additional paid-in capital 4,151,771 2,512,925 989,494
Deferred compensation (19,409) (63,076) --
Stock subscription receivable (60,747) (60,747) --
Retained earnings 1,667,151 851,620 1,300,094
------------ ------------ -----------
Total stockholders' equity 5,739,677 3,241,611 2,290,365
------------ ------------ -----------
Total liabilities and stockholders' equity $ 17,497,616 $ 13,137,067 $10,548,466
============ ============ ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
PSI INDUSTRIES, INC.
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Nine Months Ended September 30, Year Ended December 31,
-------------------------------- ---------------------------
1998 1997 1997 1996
----------------- ------------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 21,029,453 $ 17,025,282 $ 23,976,069 $ 14,055,252
Cost of sales 15,857,508 12,620,580 19,179,005 10,628,676
------------ ------------ ------------ ------------
Gross profit 5,171,945 4,404,702 4,797,064 3,426,576
Selling, general and administrative expenses 3,432,734 3,176,898 4,251,152 2,517,044
Product development costs 71,240 122,152 408,486 416,177
------------ ------------ ------------ ------------
Operating income 1,667,971 1,105,652 137,426 493,355
Other expenses:
Interest expense, net of interest income (488,690) (407,372) (582,809) (293,217)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,179,281 698,280 (445,383) 200,138
Income tax provision (benefit) 309,000 251,381 (15,874) 50,675
------------ ------------ ------------ ------------
Net income (loss) $ 870,281 $ 446,899 $ (429,509) $ 149,463
Cumulative preferred stock dividend 54,750 -- 18,965 --
------------ ------------ ------------ ------------
Net income to common stockholders $ 815,531 $ 446,899 $ (448,474) $ 149,463
============ ============ ============ ============
Net income per common share - basic $ 0.09 $ 0.06 $ (0.06) $ 0.02
============ ============ ============ ============
Net income per common share - diluted $ 0.09 $ 0.05 $ (0.06) $ 0.02
============ ============ ============ ============
Weighted average number of common shares - basic 8,601,362 7,208,657 7,392,619 7,326,853
============ ============ ============ ============
Weighted average number of common shares - diluted 9,063,586 8,298,689 7,443,183 7,785,781
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PSI INDUSTRIES, INC.
--------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Additional
Common Stock Preferred Stock Paid - In
----------------------- --------------------- -------------------
Shares Amount Shares Amount Capital
-------------------------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,004,000 $ 100 -- $-- $ 5,800
Cash distributions to stockholders -- -- -- -- --
Additional shares issued in connection with 0
6.96-for-one stock split 5,982,818 598 -- -- (598)
Issuance of shares in connection with private 0
placement, net of issuance costs of $55,427 316,966 32 -- -- 895,439
Issuance of shares to a domestic corporation 0
for cash 455,926 46 -- -- 65,154
Issuance of shares for legal services 7,900 1 -- -- 23,699
Net income -- -- -- -- 0
---------- ----- ------ --- -----------
Balance at December 31, 1996 7,767,610 777 -- -- 989,494
Pruchase of treasury stock (1,164,470) (116) -- -- (174,554)
Deferred compensation related to issuance of
1,164,470 shares of common stock in
connection with an employment agreement 1,164,470 116 -- -- 174,554
Amortization of deferred compensation -- -- -- -- --
Issuance of Preferred Stock-Series A, net of
issuance costs of $72,733 -- -- 48,667 5 1,387,639
Issuance of common stock for cash 156,000 16 -- -- 15,584
Issuance of common stock for services 397,000 40 -- -- 59,512
Issuance of common stock for subscription
receivable 516,333 51 -- -- 60,696
Preferred stock dividends -- -- -- -- --
Net loss -- -- -- -- --
---------- ----- ------ --- -----------
Balance at December 31, 1997 8,836,943 884 48,667 5 2,512,925
Issuance of Preferred Stock-Series B for inventory -- -- 15,022 15 1,502,185
Issuance of common stock for cash 103,300 10 -- -- 112,938
Issuance of common stock for services 20,500 2 -- -- 28,718
Cancellation of common stock (50,000) (5) -- -- (4,995)
Preferred stock dividends -- -- -- -- --
Deferred compensation amortization -- -- -- -- --
Net income -- -- -- -- --
---------- ----- ------ --- -----------
Balance at September 30, 1998 8,910,743 $ 891 63,689 $20 $ 4,151,771
========== ===== ====== === ===========
</TABLE>
<TABLE>
<CAPTION>
Stock Total
Deferred Subscription Retained Stockholders'
Compensation Receivable Earnings Equity
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ -- $ 1,179,631 $ 1,185,531
Cash distributions to stockholders -- -- (29,000) (29,000)
Additional shares issued in connection with
6.96-for-one stock split -- -- 0 0
Issuance of shares in connection with private
placement, net of issuance costs of $55,427 -- -- 0 895,471
Issuance of shares to a domestic corporation
for cash -- -- 0 65,200
Issuance of shares for legal services -- -- 0 23,700
Net income -- -- 149,463 149,463
--------- -------- ----------- -----------
Balance at December 31, 1996 -- -- 1,300,094 2,290,365
Pruchase of treasury stock -- -- -- (174,670)
Deferred compensation related to issuance of
1,164,470 shares of common stock in
connection with an employment agreement (174,670) -- -- --
Amortization of deferred compensation 111,594 -- -- 111,594
Issuance of Preferred Stock-Series A, net of
issuance costs of $72,733 -- -- -- 1,387,644
Issuance of common stock for cash -- -- -- 15,600
Issuance of common stock for services -- -- -- 59,552
Issuance of common stock for subscription
receivable -- (60,747) -- --
Preferred stock dividends -- -- (18,965) (18,965)
Net loss -- -- (429,509) (429,509)
--------- -------- ----------- -----------
Balance at December 31, 1997 (63,076) (60,747) 851,620 3,241,611
Issuance of Preferred Stock-Series B for inventory -- -- -- 1,502,200
Issuance of common stock for cash -- -- -- 112,948
Issuance of common stock for services -- -- -- 28,720
Cancellation of common stock -- -- -- (5,000)
Preferred stock dividends -- -- (54,750) (54,750)
Deferred compensation amortization 43,667 -- -- 43,667
Net income -- -- 870,281 870,281
--------- -------- ----------- -----------
Balance at September 30, 1998 $ (19,409) $(60,747) $ 1,667,151 $ 5,739,677
========= ======== =========== ===========
</TABLE>
See notes financial statements.
F-5
<TABLE>
<CAPTION>
PSI INDUSTRIES, INC.
--------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Nine Months Ended September 30, Year ended December 31,
----------------------------- --------------------------
1998 1997 1997 1996
------------- ---------- ------------ ---------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) $ 870,281 $ 446,899 $ (429,509) $ 149,463
----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Bad debt expense 63,000 34,000 116,000 184,828
Depreciation 63,000 47,000 76,500 48,202
Amortization 43,667 175,177 111,594 72,076
Loss on disposal of asset -- -- 3,693 --
Deferred income taxes -- -- (15,874) 15,874
Issuance of common stock for services 23,720 -- 59,551 23,700
Changes in operating assets and liabilities:
Accounts receivable (214,485) (2,290,078) (2,913,824) (166,781)
Notes receivable -- -- (174,607) --
Inventories (2,896,996) 78,694 945,194 (4,829,316)
Prepaid expenses and other current assets (177,869) 13,862 65,819 (177,598)
Other assets 411,965 20,972 (452,462) (233,462)
Accounts payable 1,620,963 (1,491,902) (1,627,260) 2,968,107
Accrued expenses 346,261 275,608 114,758 115,411
----------- ----------- ----------- -----------
Total adjustments (716,774) (3,136,667) (3,690,981) (1,978,959)
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 153,507 (2,689,768) (4,120,490) (1,829,496)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (66,081) (56,719) (407,055) (103,653)
Proceeds from disposal of property and equipment -- -- 15,900 --
Investment in patents (42,106) -- -- --
Advances to stockholders (20,981) (441,751) (125,377) (117,138)
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (129,168) (498,470) (516,532) (220,791)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(Payments to) line of credit, net (186,758) 2,040,439 3,248,955 1,354,237
Proceeds from issuance of common and preferred stock,
net of issuance costs 112,949 929,731 1,403,244 933,315
Principal payments on borrowings (24,072) (24,914) (14,514) (19,270)
Distributions to stockholders (54,750) -- (18,965) (29,000)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (152,631) 2,945,256 4,618,720 2,239,282
NET INCREASE (DECREASE) IN CASH (128,292) (242,982) (18,302) 188,995
CASH AT BEGINNING OF PERIOD 224,680 242,982 242,982 53,987
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 96,388 $ -- $ 224,680 $ 242,982
=========== =========== =========== ===========
</TABLE>
See notes financial statements.
F-6
<PAGE>
PSI INDUSTRIES, INC.
--------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30, Years ended December 31,
------------------------------------- ---------------------------
Supplemental disclosures of cash flow information: 1998 1997 1997 1996
------------------ ---------------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Noncash investing and financing activities:
Decrease in investment in H& G Venture, Inc. and
increase in property and equipment $ - $ 706,455 $ 706,455 $ -
================== ================ ============= ========
Purchase of equipment for a note payable $ 106,087 $ - $ - $ -
================== ================ ============= ========
Purchase of common stock in exchange for notes
receivable from and advances to related parties $ - $ 174,670 $ 174,670 $ -
================== ================ ============= ========
Issuance of common stock related to deferred compensation $ - $ 174,670 $ 174,670 $ -
================== ================ ============= ========
Issuance of common stock for services $ 23,720 $ - $ 59,552 $ 23,700
================== ================ ============= ========
Issuance of preferred stock for inventory $ 1,502,200 $ - $ - $ -
================== ================ ============= ========
Issuance of common stock for subscriptions receivable $ - $ - $ 60,696 $ -
================== ================ ============= ========
Interest paid $ 266,054 $ 245,650 $ 598,675 $ 299,074
================== ================ ============= ========
</TABLE>
See notes financial statements.
F-7
<PAGE>
PSI INDUSTRIES, INC.
--------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
The consolidated balance sheet at September 30,1998 and the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1998 and 1997 and the consolidated statement of stockholders'
equity for the nine months ended September 30, 1998 are unaudited but include
all adjustments which in the opinion of management, are necessary to the fair
presentation of the financial position and results of operations for the periods
then ended. All such adjustments are of normal and recurring nature. The results
of the operations for any interim period are not necessarily indicative of
results of operations for a full fiscal year.
1. ORGANIZATION
------------
PSI Industries, Inc. (the "Company") was incorporated in 1986 under the
laws of the State of Florida. The Company manufactures and distributes
a single-use camera, "The Message Camera." In addition, the Company is
a wholesale distributor of photographic film, cameras, ancillary
photographic equipment and consumer electronics nationwide to wholesale
and retail businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material inter-company transactions have been
eliminated in consolidation.
B. REVENUE RECOGNITION - Sales are recorded at the time merchandise is
shipped and risk of ownership is transferred, and are reported net of
estimated returns and allowances.
C. INVENTORIES - Inventories, consisting primarily of finished goods
held for resale and raw material, are stated at the lower of cost,
determined on the weighted average method or market.
D. PROPERTY AND EQUIPMENT - Property and Equipment is carried at cost,
less accumulated
F-8
<PAGE>
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the asset which range from 5 to 30
years.
E. ADVERTISING COSTS - The Company expenses advertising costs when
incurred, with the exception of direct costs associated with the first
showing of advertisements which are deferred until such first showing.
At December 31, 1997, advertising costs deferred and reported as
prepaid expenses and other assets were approximately $242,000.
Advertising costs, included in selling, general and administrative
expenses, totaled approximately $39,000 and $26,000 for 1997 and 1996,
respectively.
F. USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
G. PRODUCT DEVELOPMENT COSTS - Costs related to the design and
development of The Message Camera are expensed as incurred.
H. INCOME TAXES - Prior to March 31, 1996, the Company had elected to
be taxed as an S corporation pursuant to the provisions of the Internal
Revenue Code, which provides that, in general, in lieu of corporate
income taxes, the stockholders shall be taxed on the Company's taxable
income in accordance with their ownership interest. Effective March
31,1996, the Company terminated the S corporation election upon the
completed sale of shares of its common stock to a domestic corporation
(see Note 10). Deferred income taxes are determined on the liability
method in accordance with the Statement of Financial Accounting
Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES.
I. LONG LIVED ASSETS - The Company has adopted SFAS, No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In accordance with this statement, the
Company evaluates the recovery of the carrying amount of its long-lived
assets, primarily property and equipment, whenever events or changes in
circumstances indicate that the carrying amount of such assets may not
be fully recoverable. If this review indicates that the carrying value
of the assets will not be recoverable, as determined based on the
estimated non-discounted cash flows of the Company over their remaining
estimated useful lives, the carrying amount is reduced by the estimated
shortfall of cash flows.
J. EARNINGS PER SHARE - The Company has adopted SFAS, No. 128, Earnings
per Share. Net income (loss) per common share has been restated for all
periods presented to conform to the
F-9
<PAGE>
provisions of SFAS No. 128. Basic earnings (loss) per share is computed
by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share reflects the per share amount that
would have resulted if diluted potential common stock had been
converted to common stock, as prescribed by SFAS No. 128.
3. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
-------------------------------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash in banks and
trade accounts receivable. The credit risk associated with cash in
banks is considered low due to the credit quality of the institutions.
The Company performs on-going credit evaluations of its trade customers
and generally does not require collateral.
At December 31, 1997 and 1996, accounts receivable include one customer
and three customers representing 18% and 53%, respectively, whose
balance exceeds 10% of aggregate accounts receivable.
At December 31, 1997 and 1996, no single customer accounted for 10% of
sales.
4. INVENTORIES
-----------
At, December 31, 1997 and 1996, inventories are comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Raw materials $ 1,147,599 $ 575,255
Finished goods 4,626,664 6,144,202
---------------- --------------
$ 5,774,263 $ 6,719,457
================ ==============
</TABLE>
5. PROPERTY AND EQUIPMENT
----------------------
F-10
<PAGE>
At, December 31, 1997 and 1996, property and equipment is comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
---------------- ------------------
<S> <C> <C>
Building and building $ 844,320 $ 133,733
improvements
Machinery and equipment 484,583 134,166
Furniture and fixtures 173,044 139,117
Vehicles 69,338 71,368
---------------- ------------------
1,571,285 478,384
Less: Accumulated depreciation (215,784) (140,300)
---------------- ------------------
$ 1,355,501 $ 338,084
================ ==================
</TABLE>
6. INVESTMENT IN H & G VENTURE, INC.
---------------------------------
On April 24, 1995, the Company entered into a stock purchase agreement
for 35 shares of H & G Venture, Inc.( "H&G"), which represents 35% of
its authorized, issued and outstanding common stock. H&G's sole asset
is a building in which the Company occupies approximately 35% of the
available square footage. During 1997, the 65% owner of H & G
refinanced H & G's first mortgage such that it allowed for the purchase
of 35% of the building by the Company. Prior to the refinancing, the
Company purchased the above mentioned shares which were held in escrow
as collateral for the Company's note payable to the 65% owner of H & G.
The stock held in escrow was reflected on the balance sheet at December
31, 1996 as a long-term investment since the Company intended to
exchange its shares in H & G for an ownership interest in 35% of the
building. The aggregate purchase price for the shares was $700,000,
with a cash payment of $140,000 and a promissory note of $560,000(see
Note 8).
F-11
<PAGE>
7. LINE OF CREDIT
--------------
On May 29, 1997, the Company refinanced its existing revolving line of
credit. The new line of credit of $7,500,000 provides for borrowings
based on a percentage of eligible trade accounts receivable and
inventories. Borrowings pursuant to the agreement bear interest,
payable monthly, at the financial institution's prime rate plus
.25%(8.75% at December 31, 1997) and are due on demand. At December 31,
1997, there was no additional availability under this agreement. This
revolving line of credit is collateralized by substantially all
accounts receivable and inventories of the Company and is guaranteed by
certain stockholders of the Company.
Prior to May 29, 1997, the Company had a revolving line of credit with
a financial institution for $5,000,000 and provided for borrowings
based on a percentage of eligible trade accounts receivable and
inventories. Borrowings pursuant to the agreement bore interest,
payable monthly, at the financial institution's prime rate plus .25%
(8.50% at December 31, 1996) and were due on demand. This revolving
line of credit was collateralized by substantially all accounts
receivable and inventories of the Company and was guaranteed by certain
stockholders of the Company.
8. DEBT
----
Long-term debt consists of the following:
F-12
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------
<S> <C> <C>
Mortgage note, payable in monthly principal
payments of $1,890 plus interest at the financial
institutions prime rate plus .50% (9.00% at
December 31, 1997) with a balloon payment of
$449,150 due on March 31, 2002, collateralized by
building and building improvements (a) $ 539,878 $ -
Promissory note, issued in connection with the
Company's investment in H & G described in Note 6,
bearing interest at 9.875% at December 31, 1996
payable in full on January 31, 1997,
collateralized by the Company's investment in H &
G (a) - 546,451
Promissory note - 7,940
------------------------------------
539,878 554,391
Less current maturities (22,682) (26,841)
------------------------------------
$517,196 $527,550
================== =================
<FN>
(a) On January 31, 1997, the Company entered into a 90-day note payable
with a bank, the proceeds of which were used to pay-off the existing
promissory note. On March 31, 1997, this promissory note was repaid
with the proceeds of the mortgage note.
</FN>
</TABLE>
Maturities on long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 22,682
1999 22,682
2000 22,682
2001 22,682
2002 449,150
----------------
$ 539,878
================
</TABLE>
9. RELATED PARTY TRANSACTIONS
--------------------------
F-13
<PAGE>
On January 1, 1997, in connection with the issuance of shares under an
employment agreement (Note 11) certain stockholders' sold 1,164,741
shares of common stock to the Company at a purchase price of $.15 per
share totaling $174,670. The purchase price of $174,670 was paid
through the reduction of notes receivable and advances to related
parties.
As of December 31, 1997, the Company had notes receivable and advances
to related parties, due on demand, totaling $380,613, of which $187,656
represents advances to certain officers for 1998 compensation. The
Company does not intend to demand repayment prior to January 1, 1999.
10. INCOME TAXES
------------
Concurrent with the March 31, 1996 issuance of additional shares of
common stock to a domestic corporation, the Company's S corporation
election was terminated, making it subject to corporate income taxes.
The components of the income tax provision for the year ended December
31, 1997 and the period April 1, 1996 to December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Period from
April 1,
Year ended 1996 to
December 31, December 31,
1997 1996
--------------------- ----------------------
<S> <C> <C>
Current $ - $ 34,801
Deferred (15,874) 15,874
--------------------- ----------------------
Total $ (15,874) $ 50,675
===================== ======================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
(liabilities) are as follows:
10. INCOME TAXES (CONTINUED)
------------------------
F-14
<PAGE>
<TABLE>
<CAPTION>
Period from
Year ended April 1,1996
December to December
31,1997 31, 1996
------------------ --------------------
Deferred tax assets:
<S> <C> <C>
Net operating loss $ 49,587 $ -
carryforwards
Allowance for doubtful 51,983 40,512
accounts
Amortization---expansion costs - 27,132
Uniform inventory 61,332 26,774
capitalization
---------------- --------------------
Deferred tax assets 162,902 94,418
Less valuation allowance (137,194) -
---------------- --------------------
Total deferred tax assets 25,708 94,418
Deferred tax liabilities:
Fixed assets (25,708) (25,708)
Expansion costs - (84,584)
---------------- --------------------
Total deferred tax liabilities (25,708) (110,292)
---------------- --------------------
Total net deferred taxes $ - $ (15,874)
================ ====================
</TABLE>
10. INCOME TAXES (CONTINUED)
------------------------
The reconciliation of the income tax computed at the U.S. federal
statutory rate to income
F-15
<PAGE>
tax expense for the year ended December 31, 1997 and the period April
1, 1996 through December 31, 1996 is as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
----------------- ---------------
<S> <C> <C>
Tax at federal statutory rate (34.00)% 34.00%
State taxes, net of federal tax benefit (3.32) 4.14
Nondeductible items 2.95 4.78
Benefit of change in tax status - (7.08)
Benefit of graduated tax rates - (4.50)
Valuation allowance 30.80 -
----------------- ---------------
Total (3.57)% 31.34%
================= ===============
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on weight of the evidence , it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. After consideration of all the evidence, both positive and
negative, management has determined that a $137,194 valuation allowance
at December 31, 1997 is necessary to reduce the deferred tax assets to
the amount that will more likely than not be realized. The change in
the valuation allowance for the current year is $137,194. At December
31, 1997, the Company has available net operating loss carryforwards of
approximately $132,000, which expire in the year 2012.
11. COMMITMENTS
-----------
OPERATING LEASES
The Company leases vehicles and office equipment under noncancelable
operating leases expiring in various years through 2001. The leases
require the Company to pay maintenance, taxes and insurance. Future
minimum rental commitments under long-term noncancelable operating
leases are as follows:
F-16
<PAGE>
11. COMMITMENTS (CONTINUED)
-----------------------
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
1998 $ 120,265
1999 94,565
2000 28,198
2001 11,139
----------
$ 254,167
==========
</TABLE>
During the years ended December 31, 1997 and 1996, rent expense was
$110,384 and $70,895 respectively.
AGREEMENTS
Effective December 1, 1995, the Company entered into an exclusive
distributorship agreement with Keepsake, Inc. (Keepsake), a Florida
Corporation, from which the Company obtained a license to utilize the
intellectual property (technology) of Keepsake in the manufacturing and
sale of "The Message Camera." The technology involves the imprint of
graphic pictorial representations upon photographic film for these
single use cameras. On October 22, 1996, the Company amended this
agreement extending the initial term from 5 to 20 years. The agreement
provided for monthly royalty payments based on sales of single-use
cameras. In order to prevent the termination of the Company's rights
under this amended agreement, the Company is required to make certain
minimum annual guaranteed royalty payments. During 1997, the Company
incurred royalty expense to Keepsake of approximately $538,000, of
which $95,667 remains unpaid and is included in trade accounts payable
at December 31, 1997. At December 31, 1997, the remaining guaranteed
royalty commitment was approximately $23.3 million. However, effective
November 1, 1997, the Company discontinued the payments to Keepsake due
to a dispute that arose in connection with the validity of Keepsake's
patents. On February 20,1998, Keepsake terminated the distributorship
agreement and brought a suit against the Company for, among other
things, breach of contract. At December 31,1997, raw material inventory
totaling approximately $434,000 was being held by Keepsake, and,
accordingly, is included in noncurrent other assets.
See legal matters below.
On November 1, 1997 the Company entered into a nonexclusive license
agreement with Polaroid, the owner of certain patents, for the
manufacture and sale of pre-exposed film for use in The Message Camera.
The license agreement with Polariod continues until the patents expire
and may be terminated by the Company at any time by 60 days prior
written notice. In the event the Company is unable to substantially
perform its
11. COMMITMENTS (CONTINUED)
-----------------------
obligations under the agreement and such default or inability is not
cured within 60 days after written notice from Polaroid, then Polaroid
may terminate the agreement by giving written notice. The agreement
provides for monthly royalty payments of $.30 for each
F-17
<PAGE>
licensed product sold or disposed of or 5% of the net selling price of
the licensed product, whichever is greater. During 1997, the Company
incurred royalty expense to Polaroid of approximately $27,000 of which
$27,000 is included in trade accounts payable at December 31, 1997.
On January 1, 1997, the Company entered into a five-year employment
agreement with an officer that requires the Company to pay a minimum
compensation of $180,000 per year. At such time as the Company
completes an underwritten public offering, the base salary shall
increase to $250,000 per year. In addition, the Company issued to this
officer 1,164,470 shares of common stock, of which 388,156 vested on
January 1, 1997. The remaining shares vest pro rata on a monthly basis
over the period from February 1, 1997 through January 1, 1999. Deferred
compensation of $63,076 relates to the unvested shares at December 31,
1997 and is being amortized over the vesting period of the related
shares.
On July 1, 1997, the Company entered into a three year employment
agreement with an officer that requires the Company to pay a minimum
compensation of $100,000 per year, plus commissions.
LEGAL MATTERS
The Company is a defendant in an action by Keepsake, alleging, among
other things, breach of contract (failure to make continuing fee
payments, failure to accurately report sales and make payments under
its agreements), civil theft, declaratory judgement, specific
performance and injunctive relief ( failure to obtain written approval
from Keepsake before appointing exclusive sub-distributorships). This
action is at the pleadings stage. No trial date has been set.
Management believes it has a strong defense in this action; however,
given the complexity of the issues involved, it is unable to evaluate
the likelihood of a favorable or unfavorable outcome at this time.
The Company is a plaintiff in an action alleging, among other things,
breach of certain written agreements and misappropriation of trade
secrets. The defendant in that action has filed a lawsuit, in which the
Company is a named defendant, asking the court to declare it is not
infringing on certain patents underlying the technology described above
alleging, among other things, unfair competition. Both parties have
exchanged a release and settlement agreement, but it has not been
executed and the action has not been dismissed. Management intends to
continue to seek a settlement and believes the ultimate outcome will
not have a material adverse effect on the Company's financial condition
or results of operations.
The Company is one of 28 defendants in an action by Fuji Film, alleging
violation of a number of its patents. On February 26, 1999 the
Administrative Law Judge ruled in favor of Fuji potentially eliminating
the Company's use of recycled cameras. Although such ruling is not the
final decision of the International Trade Commission, nor is it binding
or enforceable, there can be no assurance the International Trade
Commission will change such ruling. However, the Company has completed
the design and development of a new 35mm camera which management
believes should eliminate any potential conflict or infringement with
any of the Fuji patents. Therefore, even if Fuji Film prevails, the
Company believes that this will not have a material effect on the
Company's business.
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 action is for, among other
things, unfair competition and patent infringement. The Company intends
to vigorously contest the complainants' claims.
F-18
<PAGE>
12. EMPLOYEE BENEFIT PLANS
----------------------
The Company has a defined contribution profit sharing plan, covering
substantially all employees with more than one year of service.
Contributions for the profit sharing plan are discretionary and
determined by the Company's Board of Directors. During the years ended
December 31, 1997 and 1996, no contributions were made to this plan
13. STOCKHOLDERS' EQUITY
--------------------
On March 11, 1996, the Board of directors authorized a 6.96-for-one
stock split resulting in 5,982,818 additional shares which were
distributed to the shareholders of record.In March 1996, the Company
issued 227,963 shares of unrestricted common stock to a domestic
corporation at approximately $0.17 per share. The issue price was
determined by the Board of Directors to be the market value at the date
of issuance. Additionally, the Company granted the corporation an
option to purchase an additional 227,963 shares of restricted stock at
$0.12 per share, which option was exercised in 1996. The option price
of $0.12 per share was determined by the Board of Directors to be the
market value at the date of grant.
In August 1996, the Company completed a private placement of 316,966
shares of common stock at $3.00 per share for an aggregate offering
price of $950,898. In connection with this private placement, the
Company issued 7,900 shares of common stock for legal services and
recorded $23,700 of expense based on the private placement offering
price of $3.00 per share. In December 1997, the Company completed a
private placement of 48,667 shares of Series A convertible preferred
stock with a $.0001 par value, at $30.00 per share for an aggregate
offering price of $1,460,377. The Series A convertible preferred stock
provides for payment of semiannual cash dividends of 5% per annum
($18,695 for the year ended December 31, 1997). Each share of Series A
convertible preferred stock is convertible at the option of the holder
into ten shares of the Company's common stock, $.0001 par value,
equivalent to a price of $3.00 per share of common stock. The
conversion price is subject to adjustment in the event the average of
the Company's earnings per share for its fiscal years of 1997 and 1998,
on a fully diluted basis (the "Average EPS"), is less than $.20 per
share, in which event the conversion price shall be reduced to a number
that equals 15 times the Average EPS, provided that in no event shall
the conversion price be reduced below $2.50, an equivalent of 12 shares
of the Company's common stock. At any time after one year from the date
of issuance, the 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
F-19
<PAGE>
and declared effective. The holders of the Series A convertible
preferred stock are entitled to such number of votes as are equal to
the number of shares into which their holdings are convertible and vote
together with the holders of the Company's common stock. In the event
of liquidation, dissolution or winding up of the Company, the holders
are entitled to share ratably, with all other holders of preferred
stock all assets remaining available for distribution after payment of
liabilities, but before any payments are made to the holders of common
stock, up to $30.00 per share, plus any accrued but unpaid dividends.
In connection with this private placement, the Company issued warrants
to purchase 202,77 shares of common stock to the placement agent. The
warrants are exercisable at $3 per share after December 30, 1998 and
prior to December 30, 2002. The conversion price is subject to
adjustment in the event Average EPS is less than $.20 per share, in
which event the conversion price shall be reduced to a number that
equals 15 times the Average EPS, provided that in no event shall the
conversion price be reduced below $2.50.
14. STOCK OPTION PLAN
-----------------
On March 15, 1996, the Company established the PSI Industries, Inc.
1996 Stock Option Plan (the "Plan"). The Company has elected to follow
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related Interpretations on accounting for its
employee stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, requires the use of option valuation models
that were not developed for use in valuing employee stock options.
Under APB No. 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock at the
date of grant, no compensation expense is recognized.
Pursuant to the Plan, during 1996, the Company granted options to its
employees to purchase 224,000 shares of its common stock at an exercise
price of $0.10 per share and 366,333 at an exercise price of $.11 per
share. From July 1, 1997 through December 31, 1997 the Company granted
options to its employees to purchase 135,000 shares of its
F-20
<PAGE>
14. STOCK OPTION PLAN(CONTINUED)
----------------------------
common stock at an exercise price of $.15 per share and 5,000 shares at
an exercise price of $.25 per share. The exercise prices were
determined by the Board of Directors to be the market value at the date
of grant, and, therefore, no compensation expenses was recognized.
Under the Plan, incentive stock options ("ISOs") may be granted at an
exercise price of not less than the market value at the date of grant,
except for ISOs granted to a 10% or greater stockholder, for which the
exercise price is no less than 110% of the market value at the date of
grant.
During 1997, the Company issued 397,000 shares of restricted common
stock in exchange for services which were valued at $59,551.
During 1997, 672,333 options granted under this plan were exercised of
which 156,000 were exercised for cash and 516,333 were exercised for
stock subscriptions receivable.
Pro forma information regarding net income is required by SFAS No. 123,
and has been determined as if the Company had accounted for its
employees stock options under the fair value method of that statement.
The fair value of outstanding options was estimated at the date of
grant using the minimum value method, using the following assumptions:
risk free rate of 5.11% for 1997, no expected dividends and weighted
average expected life of the options of 2.7 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Based
on the assumptions utilized above, the pro forma impact on net loss for
1997 is not materially different from amounts reported.
15. EARNINGS PER SHARE
------------------
F-21
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended
December 31
1997 1996
--------------------------------------------
<S> <C> <C>
Numerator:
Net (loss) income $ (429,509) $ 149,463
Dividend on Series A preferred stock (18,965) -
--------------------- ---------------------
Numerator for basic and diluted
earnings (loss) per share-income
available to common stockholders $ (448,474) $ 149,463
--------------------- ---------------------
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares
outstanding 7,392,619 7,326,853
Effect of dilutive securities
Options - 454,497
--------------------- ---------------------
Denominator for diluted earnings (loss)
per share-adjusted weighted average and
assumed conversions 7,392,619 7,781,350
===================== =====================
Basic earnings (loss) per share $ (0.06) $ 0.02
===================== =====================
Diluted earnings (loss) per share $ (0.06) $ 0.02
===================== =====================
</TABLE>
16. BANK CREDIT
-----------
On September 15, 1998, the Company entered into a new credit agreement
with a bank, which replaces the existing line of credit. The new
agreement of $12,000,000 provides for borrowings based on a percentage
of eligible trade accounts receivable and inventories. Several options
are available to borrow at floating interest rates based on LIBOR
(London Interbank Offered Rate) plus 2.25% or, at the financial
institution's prime rate. The loan is due on demand. The credit
agreement is collateralized by substantially all assets of the Company.
The credit agreement contains covenants that
F-22
<PAGE>
place certain limits on the Company's ability to merge with another
entity, incur debt or create liens on assets. In addition the credit
agreement requires the Company to meet a tangible net worth test.
17. YEAR 2000 ISSUE AND SUBSEQUENT EVENTS (UNAUDITED)
-------------------------------------------------
A. Until recently, many computer programs were written using two digits
rather than four digits to define the applicable year in the twentieth
century. Such software may recognize a date using "00" as the year 1900
rather than the year 2000. Utilizing both internal and external
resources, the Company is in the process of defining, assessing and
converting or replacing various programs, hardware and instrumentation
systems to make them Year 2000 compatible. The Company's Year 2000
project is comprised of two components-business applications and
equipment. The business applications component consists of the
Company's business computer systems, as well as the computer systems of
third-party suppliers or customers, whose Year 2000 problems could
potentially impact the Company. Equipment exposures consist of personal
computers, system servers, and telephone equipment whose Year 2000
problems could also impact the Company. Management believes that the
cost of its Year 2000 initiatives is not expected to be material to the
Company's results of operations or financial position.
B. Through November, 1998, the Company sold 1,037,500 shares of
common stock for $1,000,000 under Rule 504.
C. 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. 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.
F-23
<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)
4.1 Designation of Series C Convertible Preferred Stock
[4.1] (2)
4.2 Form of Warrant Certificate [4.2] (1)
4.3 Form of Series A Preferred Stock Certificate
[4.3] (1)
4.4 Form of Series B Preferred Stock Certificate
[4.4] (1)
4.5 Form of Series C Preferred Stock Certificate (2)
4.6 Form of Series II Common Stock Purchase Warrant
Agreement between the Company and Florida Atlantic
Stock Transfer, Inc. (2)
4.7 Form of Underwriters' Purchase Option [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*
10.9 Financial Advisory Agreement between Registrant and
Merit Capital Associates, Inc. dated October 1,
1998*
10.10 Manufacturing & Sales Agreement between Registrant,
Chengdu Hoist Recording Instrument Co., Ltd. and
Mass Chance Electronics dated March 26, 1999*
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.
38
<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: April 13, 1999 By: /S/BENJAMIN COHEN
-----------------------
Benjamin Cohen, President
39
AGREEMENT
This Agreement (the "Agreement") is made and entered into and between
PSI Industries, Inc. this publicly held corporation organized under the laws of
the State of Florida (the "Corporation") and Stedman Walker, a New York
corporation (the "Consultant"), the Corporation and the Consultant being
hereinafter collectively referred to as the "Parties" and generically as a
"Party").
PREAMBLE:
Whereas, the Corporation requires advice and assistance in a number of areas
pertaining to its status as a public company with securities to be registered
under the Securities Exchange Act of 1934, as amended, including the area of
shareholder relations, coordination with national and international investment
banking community and financial public relations and
Whereas, the Consultant has substantial experience in such areas as well as
access to other required professionals;
Now, therefore, in consideration for the Consultants Agreement to render the
here and after described services as well as of the premises, the sum of ten
(10) dollars and other good and valuable consideration, the receipt of adequacy
of which is hereby acknowledged, the Parties, intending to be legally bound,
hereby agree as follows:
WITNESSETH:
ARTICLE ONE
CONSULTANT'S SERVICES
1. SERVICES
A. The Consultant shall serve as the financial public relations advisor
for the Corporation. In rendering such services, the Consultant shall act:
1. As liaison between the Corporation and its shareholders;
2. As an advisor to the Corporation with respect to existing
and potential market-makers, broker-dealers, underwriters and investors as well
as serving as liaison between the Corporation and such persons; and
3. As an advisor for the Corporation with respect to the
communications and information (e.g. interviews, press releases, shareholder
reports, etc.) as well as planning, designing, developing, organizing, writing
and distributing such communications and information.
1
<PAGE>
B. To the extent requested by the Corporation the consultant shall
assist in establishing and advising the Corporation with respect to shareholder
meetings; interviews of the Corporation's officers by the financial media and
interviews of the Corporation's officers by analysts, market-makers, broker
dealers, and other members of the financial community.
C. To the extent by the Corporation, the Consultant shall seek to make
the Corporation, its management, its products, and its financial situation and
prospects, known to the financial press and publications broker-dealers, mutual
funds, institutional investors, market makers, analysts, investment advisors and
other members of the financial community as well as the financial media and the
public generally.
D. The Consultant shall not disclose to any third party any
confidential non-public information furnished by the Corporation or otherwise
obtained by it with respect to the Corporation. This obligation shall survive
termination of this AGREEMENT.
2. LIMITATIONS ON SERVICES
A. The Parties recognize that certain responsibilities and obligations
are imposed by federal and state securities laws and by the applicable rules and
regulations of stock exchanges, the National Association of Securities Dealers,
Inc. in house "due diligence" or "compliance" departments of brokerage houses,
etc.
Accordingly, the Consultant agrees that it will not:
1. Release any financial or other material information
or data about the Corporation without the prior consent and approval of the
Corporation;
2. Conduct any meetings with financial analysts without
informing the Corporation in advance of the proposed meeting and the format or
agenda of such meeting;
3. Release any information or data about the Corporation to
any selected or limited person(s), entity, or group if consultant is aware that
such information or data has not been generally released or promulgated.
B. The Consultant shall restrict or cease, as directed by the
Corporation, all public relations, efforts, including all dissemination of
information regarding the Corporation immediately upon receipt of instructions
(in writing by fax or letter) to that effect from the Corporation. If the
Consultant learns of any pending public securities offering to be made or
expected to be by the Corporation. The Consultant ceased all public relations
activities on behalf of the Corporation capitalized until receipt of
instructions by the Corporation in writing as to how to proceed, and thereafter
shall proceed only in accordance with the Corporation's written instructions.
2
<PAGE>
C. The Consultant shall not take any actions, which would in any way
adversely affect the reputation, standing or prospects of the Corporation or
would cause the Corporation to be in violation of applicable law.
3. DUTIES OF THE CORPORATION
A. The Corporation shall supply the consultants, on a regular and
timely basis with all approved data and information about the Corporation, its
management, its products and its operations and the Corporation shall be
responsible for advising the Consultant of any fact which would effect the
accuracy of any prior data and information supplied to the Consultant.
B. The Corporation shall use its best efforts to promptly supply the
Consultants with full and complete copies of all filings with all federal and
state securities agencies, with full and complete copies of all shareholder
reports and communications whether or not prepared with the Consultant's
assistance with all data and information supplied to any analyst, broker-dealer,
market maker or any other member of the financial community; and with all
product or services brochures, sales, materials, etc.
C. The Corporation shall promptly notify the consultant of the filing
of any registration statement for the sale of securities and/or of any other
event, which triggers any restrictions on the public relations efforts of the
consultant.
D. The Corporation shall notify the Consultant if any information or
data supplied by the Corporation to the Consultant has not been released or
promulgated to the public.
ARTICLE 2
CONSULTANTS COMPENSATION
2.1 CONSULTING FEES
The Consultant shall be entitled to the following compensation for services to
be rendered:
A. A fixed monthly consulting fee of $5,000.00 payable monthly in
advance and 7,500 shares of the company's restricted common stock payable
quarterly.
B. In addition to such fees, the Corporation shall immediately
reimburse the Consultant for any out of pocket fees or expenses incurred in the
performance of his duties. All expenses incurred shall be on a pre-approved
basis only.
3
<PAGE>
C. This contract will remain in effect for a one-year period and will
be subject to earlier cancellation by either Party with or without cause upon 30
day written notice.
ARTICLE 3
CONFIDENTIALITY AND COMPETITION
3.1 CONFIDENTIALITY
The Corporation acknowledges that as a result of its entry into this Agreement
it will be making use of, acquiring and/or adding to, confidentiality
information relating to the consultant and its business contacts; consequently,
as material inducement to the Consultant's entry into its Agreement, the
Corporation hereby covenants and agrees that it shall not, at any time during or
following the term of this Agreement, directly or indirectly, personally use,
divulge or disclose, for any purpose whatsoever, any of such confidential
information which has been obtained by or disclosed to it as a result of entry
hereinto. In the event of a breach or threatened breach by the Corporation or
any member of the Controlling Stockholder Group of any of the provisions to this
Article Three, the Consultant in addition to and not in limitation of any other
rights, remedies or damages available at law or in equity, shall be entitled to
a permanent injunction in order to prevent or to restrain any such breach by the
Corporation or by the Corporation's partners, agents, representatives, servants,
employers, employees, affiliates, and or any and all persons directly or
indirectly acting for or with it.
3.2 COMPETITION AND NON CIRCUMVENTION
There are no restrictions against competition imposed by this Agreement, it
being the understanding of the parties that this is a non-exclusive Agreement.
3.3 SPECIAL REMEDIES
In view of the irreparable harm and damage which would undoubtedly occur to the
Corporation or the Consultant as a result of a breach by either Party of the
covenants or Agreements contained in this Article Three and in view of the lack
of an adequate remedy at law to protect either Party's interests it is hereby
agreed that either Party shall have the following additional rights and remedies
in the event of a breach hereof.
A. Both parties hereby consent to the issuance of a permanent
injunction in joining it from any violations of the covenants set forth in
Section 3.1 hereof; and
3.4 CUMULATIVE REMEDIES
The Corporation and the Consultant hereby irrevocably agrees that the remedies
described in Section 3.3 hereof shall be in addition to, and not in limitation
of the rights or remedies in which both parties may be entitled to, whether at
law or in equity, under or pursuant to this Agreement.
4
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
4.1 NOTICES
All notices, demands or other written communications hereunder shall be in
writing, and unless otherwise provided, shall be deemed to have been duly given
on the first business day after mailing by United States registered or certified
mail, return receipt requested, postage prepaid, address as follows:
TO THE CONSULTANT:
Stedman Walker, LTD.
TO THE PRINCIPAL:
PSI Industries, Inc.
In each case, with copies to such other address or to such other persons as any
Party shall designate to the others for such purposes in the manner hereinabove
set forth.
4.2 AMENDMENT
No modification, waiver, amendment, discharge or change of its Agreement shall
be valid unless the same is in writing and signed by parties.
4.3 MERGER
This instrument together with the instruments referred to herein, contains all
of the understandings and Agreements of the parties with respect to the subject
matter discussed herein. All prior Agreements whether written or oral are merged
herein and shall be of no force or effect.
4.4 SURVIVAL
The several representations, warranties and covenants of the parties contained
herein shall survive the execution hereof and shall be effective regardless of
any investigation that may have been made or may be made by or on behalf of any
Party.
5
<PAGE>
4.5 SEVERABILITY
If any provision or any portion of this Agreement, other than a conditions
precedent, if any, or the application of such provision or any portion hereof to
any person or circumstance shall be held invalid or unenforceable. The remaining
portions of such provisions and the remaining provisions of this Agreement or
the application of such or portion of such provisions as is held invalid or
unenforceable to persons or circumstances other than those to which it is held
invalid or unenforceable, shall not be affected thereby.
4.6 GOVERNING LAW AND VENUE
This Agreement shall be construed in accordance with the laws of the State of
Florida and any proceeding arising between the Parties in any matter pertaining
or relating to this Agreement shall, to the extent permitted by law, be held in
the Palm Beach County, Florida.
4.7 LITIGATION
In any action between the parties to enforce any of the terms of this Agreement
or any other Agreement arising from the Agreement, the prevailing Party shall be
entitled to recover its costs and expenses including reasonable attorneys' fees
up to and including all negotiations, trials and appeals, whether or not
litigation is initiated.
4.8 BENEFIT OF AGREEMENT
The terms and provisions of this Agreement shall be binding upon and inure to
the benefit of the parties, jointly and severally, their successors, assigns,
personal representatives, estates, heirs and legatees.
4.9 CAPTIONS
The captions in this Agreement are for convenience and reference only and in no
way define, describe, extend or limit the scope of this Agreement or the intent
of any provisions hereof.
4.10 NUMBER AND GENDER
All pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular or plural, as the identity of the Party or
Parties, or their personal representatives, successors and assigns may require.
6
<PAGE>
4.11 FURTHER ASSURANCES
The parties hereby agree to due, execute, acknowledge and deliver or cause to be
done, executed, acknowledge or delivered and to perform all such acts and
deliver all such deeds, assignments, transfers, conveyances, powers of
attorneys, assurances, stock certificates and other documents, as may, from time
to time be required herein to effect the intent in purpose of this Agreement.
4.12 STATUS
Nothing in this Agreement shall be construed or shall constitute a partnership,
joint venture, employer-employee relationship, lesser-lessee relationship, or
principal-agent relationship.
4.13 COUNTERPARTS
This Agreement may be executed in any number of counterparts delivered through
facsimile transmission. All executed counterparts shall constitute one Agreement
notwithstanding that all signatories are not signatories to the original or the
same counterpart.
4.14. LICENSE
This Agreement is the property of Stedman Walker, LTD., a limited liability
company. The use hereof by the parties is authorized hereby solely for purposes
of this transaction and the use of this form of Agreement or deviation thereof
without prior written permission is prohibited.
IN WITNESS WHEREOF, the parties have executed this Agreement effected of the
twenty-sixth day of August, 1998. Signed, Sealed and Delivered in Our Presence.
PSI INDUSTRIES, INC., On its own and as the
agent for the Controlling Stockholder Group
By: /S/ DOMINICK M. SEMINARA
------------------------------
Dominick M. Seminara, President
By: /S/ DONNA MARIE SILVERMAN
-------------------------
Donna Marie Silverman, President
7
FINANCIAL ADVISORY AGREEMENT
This Agreement is made and entered into as of the 1st day of October,
1998, between PSI INDUSTRIES, INC. (the "Company") and MERIT CAPITAL ASSOCIATES,
INC. (the "Financial Advisor").
W I T N E S S E T H:
WHEREAS, the Company is seeking financial advice regarding financing
activities, possible business combinations and other financial advisory and
investment banking matters; and
WHEREAS, the Financial Advisor is willing to furnish business and
financial related advice and services to the Company on the terms and conditions
hereinafter set froth.
NOW, THEREFORE, in consideration of the mutual terms and covenants
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties agree as follows:
1. PURPOSE. The Company hereby engages the Financial Advisor on a
-------
non-exclusive basis for the term specified in this Agreement to render financial
and business advisory consulting advice to the Company upon the terms and
conditions set forth herein. This Agreement is meant to formalize an oral
understanding arrived at between the Company and the Financial Advisor in the
fall of 1996.
2. DUTIES OF THE FINANCIAL ADVISOR. During the term of this Agreement,
-------------------------------
the Financial Advisor will provide the Company with consulting advice as
specified below at the request of the Company, provided that the Financial
Advisor shall not be required to undertake duties not reasonably within the
scope of the consulting advisory service in which the Financial Advisor is
engaged generally. In performance of these duties, the Financial Advisor shall
provide the Company with the benefits of its best judgment and efforts. It is
understood and acknowledged by the parties that the value of the Financial
Advisor's advice is not measurable in any quantitative manner, and that the
amount of time spent rendering such consulting advice shall be determined
according to the Financial Advisor's discretion.
The Financial Advisor's duties may include, but will not necessarily be
limited to, rendering the following services to the Company:
(a) Study and review the business, operations and historical
performance of the Company so as to enable the Financial Advisor to provide
advice to the Company;
1
<PAGE>
(b) Assist the Company in attempting to formulate the optimum
strategy to meet the Company's working capital and capital resources needs
during the period of this Agreement;
(c) Prepare a plan to assist the Company to attract market
makers for the Company's stock, and to assist in bringing more market visibility
to the Company's stock;
(d) Consult with Company management on an as-needed basis
regarding general business issues and their effect on investors;
(e) Assist in the formulation of the terms and structure of
any reasonable proposed business combination transaction involving the Company;
(f) Assist the Company in formulating the terms and/or
structure of a debt and/or equity financing in such amounts that the Company and
the Financial Advisor agree are required for the purpose of financing the
Company's operations; and
(g) Advise the Company as to the expected reaction of the
financial community to any proposed business combination and/or financing, and
assist in determining the optimum means of communicating the pertinent aspects,
such as strategic consideration, benefits to the Company and financial impact,
to the financial community.
3. TERM. The term of this Agreement shall commence on the date of this
----
Agreement and shall continue for a period of four (4) years form the date of
this Agreement. This Agreement is terminable by either party upon fifteen (15)
days' prior written notice with or without cause, provided, however, that no
such termination shall effect the indemnification obligations of the Company as
provided herein.
4. COMPENSATION. As compensation for the services to be provided
------------
hereunder, the Company shall issue to the Financial Advisor 100,000 restricted
shares of the Company's Common Stock. In addition, the Company agrees form time
to time upon request to reimburse Financial Advisor for reasonable out-of-pocket
expenses incurred.
5. THE FINANCIAL ADVISOR AS AN INDEPENDENT CONTRACTOR. The Financial
--------------------------------------------------
Advisor shall perform its services hereunder as an independent contractor and
not as an employee of the Company or an affiliate thereof. It is expressly
understood and agreed to by the parties hereto that the Financial Advisor shall
have no authority to act for, represent or bind the Company or any affiliate
thereof in any manner, except as may be agreed to expressly by the Company in
writing from time to time.
6. INFORMATION. The Company recognizes and confirms that the Financial
-----------
Advisor in acting pursuant to this Agreement may be using information in reports
2
<PAGE>
and other information provided by others, including, without limitation,
information provided by or on behalf of the Company and that the Financial
Advisor does not assume responsibility for and may rely, without the Company's
independent verification, on the accuracy and completeness of any such reports
and information. The Company hereby warrants that any information relating to
the Company that is furnished to the Financial Advisor by the Company will be
fair, accurate and complete and will not contain any material omissions or
misstatements of fact. The Company agrees that any information or advice,
without limitation, rendered by the Financial Advisor is for the confidential
use of the Company, its Board of Directors and its shareholders in their
evaluation of a Transaction or Transactions and, except as otherwise required by
law, the Company will not and will not permit any other party to disclose any
such advice or information in any manner without the Company's prior written
consent.
7. CONFIDENTIAL INFORMATION. The Company will furnish to the Financial
------------------------
Advisor in connection with performance of its services hereunder such
information and materials ("Confidential Information") regarding the business
and financial condition of the Company as the Financial Advisor may reasonably
request from time to time. The Financial Advisor shall keep all Confidential
Information so furnished to it confidential and shall use the same only in
connection with the performance of the services hereunder. Except in the
performance of its services hereunder, the Financial Advisor shall not disclose
any Confidential Information to any third parties (other than its employees,
advisors, agents and counsel who are engaged in assisting the Financial Advisor)
except: (a) to the extent the information was in the public domain when received
by the Financial Advisor; (b) to the extent that the information was, or without
any prior disclosure thereof by the Financial Advisor becomes, lawfully
obtainable by the Financial Advisor from other sources not under any obligation
of confidentiality to the Company; and (c) to the extent required by applicable
law.
8. MISCELLANEOUS.
--------------
(a) Any notice of communication permitted or required
hereunder shall be in writing and shall be deemed sufficiently given if
hand-delivered or sent postage prepaid by certified or registered mail, return
receipt requested, to the respective parties as set forth below, or to such
other address as either party may notify the other in writing:
If to the Company: Dominick M. Seminara,
Chief Executive Officer
PSI Industries, Inc.
1160-B South Rogers Circle
Boca Raton, Florida 33487
If to the Financial Advisor: Scott Crane, Managing Director
Merit Capital Associates, Inc.
1221 Post Road East
Westport, Connecticut 06880
3
<PAGE>
(b) This Agreement shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors, legal
representatives and assigns.
(c) This Agreement may be executed in any number of
counterparts, each of which together shall constitute one and the same original
document.
(d) No provision of this Agreement may be amended, modified or
waived, except in a writing signed by all of the parties hereto.
(e) This Agreement shall be construed in accordance with and
governed by the laws of the State of Florida, without giving effect to conflict
of law principles. The parties hereby agree that any dispute which may arise
between them arising out of or in connection with this Agreement shall be
adjudicated before a court located in Palm Beach County, Florida, and they
hereby submit to the exclusive jurisdiction of the courts of the State of
Florida located in Palm Beach County, Florida and of the federal courts in the
Southern District of Florida with respect to any action or legal proceeding
commenced by any party, and irrevocably waive any objection they now or
hereafter may have respecting the venue of any such action or proceeding brought
in such a court or respecting the fact that such court is an inconvenient forum,
relating to or arising out of this Agreement and consent to the service of
process in any such action or legal proceeding by means of registered or
certified mail, return receipt requested, in case of the address set forth in
subparagraph (b) above.
(f) This Agreement has been duly authorized, executed and
delivered by and on behalf of the Company and the Financial Advisor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PSI INDUSTRIES, INC.
By: /S/ DOMINICK M. SEMINARA
------------------------
Dominick M. Seminara,
Chief Executive Officer
MERIT CAPITAL ASSOCIATES, INC.
By: /S/ SCOTT CRANE
---------------
Scott Crane, Managing Director
4
MANUFACTURING & SALES AGREEMENT
THIS MANUFACTURING AGREEMENT is made and entered into as of this 26th
day of March, 1999, by and between CHENGDU HOIST RECORDING INSTRUMENT CO., LTD.,
having its principal place of business at Group 6, Gos Sun District, Chengdu,
Sichuan Province, China and MASS CHANCE ELECTRONICS (Shenzhen Co. LTD.) having
its principal place of business at Room 1703, A Block, Carrianna Friendship
Square, ______________ Road, Shenzhen, China (hereinafter referred to as Hoist)
and PSI INDUSTRIES, INC., having its principal place of business at 1160B South
Rogers Circle, Boca Raton, Florida 33431 (hereinafter referred to as "PSI").
RECITALS
A. PSI is the exclusive distributor of a series of 35mm one time use
occasion specific cameras known as The Message CameraJfor the consumer market
and any other products (the "Products"), developed pursuant to a licensing
agreement with Polaroid Corporation which allows PSI to produce one time use
cameras with messages on the film making use of the Polaroid patents.
B. PSI wishes to purchase from Hoist products which it would produce
built to PSI specification or cause Hoist to source the PSI identified product
in which Hoist will purchase from other makers or sub vendors and that act as
the maker of record to PSI, and Hoist has particular expertise in the
manufacturing of cameras and photo products in China.
C. Hoist wishes to extend the following terms and conditions of sale to
PSI and PSI accepts the terms and conditions of sale provided below.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. EFFECTIVE DATE. March 1, 1999
--------------
2. TERMS. 3 years with automatic option for additional three
-----
(3) year term renewals at PSI option, via a sixty (60) day written notification.
3. CREDIT LINE. Hoist will offer PSI a $5,000,000.00 U.S. Line
-----------
of open credit. If additional credit is required due to increased purchases,
Hoist will extend an increased credit line to meet the sales purchase
requirements of PSI Industries as long as PSI is current in its repayment of
purchase.
4. CREDIT TERMS. All credit extended to PSI will be based on
------------
the interest rate per annum as published by the Central Bank of China at the
time of shipment (from Hong Kong) to PSI, plus ten percent (10%) of the interest
rate added onto the published rate, for example, if the published interest rate
1
<PAGE>
was 6.50% with the ten percent (10%) added on the total interest rate per annum
would be 7.15%, Hoist shall notify PSI of the interest rate percentage for each
shipment by placing the interest rate directly on the original invoice and
copies.
5. FOB PRICING. Hoist agrees that all prices being offered to
------------
PSI will be very competitive priced based on fair market value (defined as the
cost which a similar product may be purchased from other makers of the same
standard by PSI Industries). FOB pricing shall be mutually agreed upon by all
parties.
6. PRODUCT RANGE. Hoist agrees to offer PSI the same terms
-------------
and conditions of payment for any product which PSI may identify which can cost
effectively be purchased by other makers to PSI specifications and purchased
through Hoist in China.
7. QC/QA. Hoist will be the maker of record, and be
-----
responsible to produce each product which PSI selects, to acceptable standards
for quality and reliability as defined by PSI specifications.
8. GUARANTEE. Hoist agrees to replace or issue credit for any
---------
and all product found to be defective in PSI's determination, including all
importing changes.
9. SHIPMENT TERMS. FOB Hong Kong.
--------------
10. FREIGHT TERMS. All prices quoted and invoiced to PSI will
-------------
be FOB Hong Kong, delivered to the PSI freight forwarder or designed carrier in
Hong Kong which shall include all Inland clearances and freight charges.
11. INVOICING. All shipments will be invoiced effective
---------
Receipt of Goods (ROG) Los Angeles/Long Beach port, and/or any given shipment
upon clearance through U.S. Customs.
12. REPAYMENT. PSI agrees to repay Hoist based on the
---------
following scheduled for each invoiced shipment:
30 days after U.S. Customs clearance - 50%
60 days after U.S. Customs clearance - 25%
90 days after U.S. Customs clearance - 25%
13. LOAN SECURITY. As security for the credit line, PSI will
issue to escrow to Atlas, Pearlman, Trop & Borkson, P.A., Fort Lauderdale,
Florida (the "Escrow Agent") shares of a newly created series of Preferred
Stock, designated as Series D Convertible Preferred Stock (the "Preferred
Stock"). PSI will issue to the Escrow Agent as collateral for the credit line an
2
<PAGE>
amount of Preferred Stock equal in stated value to $5,000,000.00. The Preferred
Stock will be convertible into Common Stock of PSI solely upon any default in
the obligation to Hoist at a conversion price equal to the average closing bid
price of the Common Stock of PSI for the five (5) trading days preceding such
default. The Preferred Stock will not bear any incremental dividend and may not
be assigned by Hoist or thereunder transferred, assigned or sold until an event
of default occurs with respect to the obligation.
14. ARMS LENGTH RELATIONSHIPS Hoist agrees and confirms that
-------------------------
all prices quoted to PSI include any and all finders' fees, consideration,
overrides or other forms of compensation to any second or third parties. No
compensation of any form, directly or indirectly shall be offered, given or
directed to any director, officer, employee, consultant, or otherwise affiliated
with or connected to PSI in any way.
14(a). FIRST RIGHT OF REFUSAL. Under the terms of this
----------------------
contract, Hoist shall have first right of refusal to become the exclusive sales
agent for PSI products in Southeast Asia and Hoist will have the right to market
such products in Southeast Asia under a separate agreement.
15. TERMINATION. By Hoist - This agreement shall remain in
-----------
full force for as long as PSI makes repayment under the terms as stated above.
Should PSI not comply with these repayment terms and the sixty (60) day notice
period, Hoist shall notify PSI of its intent to terminate the agreement via
registered mail or fax allowing for an additional thirty (30) day notice period
after which the agreement shall be terminated if payment has not been made.
16. COPYRIGHTS, TRADEMARKS & PATENTS. The use of any or all
--------------------------------
PSI copyrights, trademarks or patent rights authorized by PSI for use in the
production of PSI product may be used by Hoist only as long as this agreement
shall remain in effect and only for PSI. Immediately upon termination of this
agreement, all rights or use shall return to PSI.
17. GOVERNING LAW. This agreement shall be construed, enforced
-------------
and performed to in accordance with the laws of the State of Florida. For all
purposes of this agreement, the parties hereto consent and agree that the
________________ state courts within the State of Florida, United States shall
have exclusive jurisdiction over any case, claim or dispute arising out of the
construction, interpretation or enforcement of this agreement. This prevailing
party shall be entitled to recover its attorney's fees in connection with any
litigation between the parties over the agreement.
18. SEVERABILITY. If a provision in this agreement is held by
------------
a court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way.
3
<PAGE>
19. COUNTERPARTS. This agreement may be executed in one or
------------
more counterparts, all of which together shall constitute an original document.
MASS CHANCE ELECTRONICS CHENGDU HOIST RECORDING
(Shenzhen Co., Ltd.) INSTRUMENTS CO., LTD.
By:______________________________ By:________________________________
Dated:___________________________ Dated:_____________________________
PSI INDUSTRIES, INC.
By:______________________________
Dated:___________________________
4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 96,388 224,680
<SECURITIES> 0 0
<RECEIVABLES> 4,801,418 4,617,778
<ALLOWANCES> 170,297 138,142
<INVENTORY> 10,173,459 5,774,265
<CURRENT-ASSETS> 15,778,339 10,776,487
<PP&E> 1,743,453 1,571,285
<DEPRECIATION> 278,784 215,784
<TOTAL-ASSETS> 17,497,616 13,137,067
<CURRENT-LIABILITIES> 11,154,238 9,352,552
<BONDS> 621,893 539,878
<COMMON> 891 884
0 0
20 5
<OTHER-SE> 5,738,766 3,240,722
<TOTAL-LIABILITY-AND-EQUITY> 17,497,616 13,137,067
<SALES> 21,029,453 23,976,069
<TOTAL-REVENUES> 0 0
<CGS> 15,857,508 19,179,005
<TOTAL-COSTS> 3,503,974 4,659,638
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 488,690 582,809
<INCOME-PRETAX> 1,179,281 (445,383)
<INCOME-TAX> 309,000 (15,874)
<INCOME-CONTINUING> 870,281 (429,509)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 870,281 (429,509)
<EPS-PRIMARY> 0.09 (0.06)
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