U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number:
PSI INDUSTRIES, INC.
(Exact name of Small Business Issuer as specified in its Charter)
FLORIDA 59-2736501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1160 B South Rogers Circle, Boca Raton, Florida 33487
(Address of principal executive offices)
(561) 997-1133
(Issuer's telephone number)
(Former Name, former address and former fiscal year,
if changed since last Report.)
Check mark whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 11,600,777 shares of Common
Stock as of May 15, 1999.
<PAGE>
PSI INDUSTRIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet - March 31, 1999
Statements of Operations for the Three Months Ended
March 31, 1999 and 1998
Statements of Cash Flows for the Three Months Ended
March 31, 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis and Plan of
Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 5. Other Information
1
<PAGE>
PSI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
March 31, 1999 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalent $ 192,416 $ 275,987
Accounts receivable, net of allowance for doubtful accounts
of $247,780 in 1999 and $217,415 in 1998 5,516,563 3,096,434
Inventories 11,474,821 12,270,811
Deferred income taxes 194,324 194,324
Prepaid expenses and other current assets 1,172,982 1,108,178
------------ ------------
Total current assets 18,551,106 16,945,734
Notes receivable from and advances to related parties 467,574 458,787
Property and equipment, net 1,374,577 1,400,653
Other assets 633,950 528,802
------------ ------------
Total assets $ 21,027,207 $ 19,333,976
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 6,163,230 $ 4,849,882
Accrued expenses 291,921 233,620
Notes payable 124,610 303,320
Line of credit 6,854,279 6,425,413
Current portion of long-term notes payable 33,328 33,328
------------ ------------
Total current liabilities 13,467,368 11,845,563
Deferred income taxes 194,324 194,324
Long-term notes payable 623,685 632,152
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock-Series A $.0001 par value,
70,000 shares authorized, 48,667 shares issued and
outstanding in 1998, $1,460,010 liquidation value -- 5
Convertible Preferred Stock-Series B $.001 par value,
20,000 shares authorized, 15,022 shares issued and
outstanding, $1,502,200 liquidation value 15 15
Common Stock, $.0001 par value-60,000,000 shares authorized, 11,600,777
and 9,985,743 shares issued and outstanding in 1999 and 1998, respectively 1,160 999
Paid-in capital 9,629,045 9,052,777
Stock subscription receivable (605,747) (39,747)
Accumulated deficit (2,282,643) (2,352,112)
------------ ------------
Total stockholders' equity 6,741,830 6,661,937
------------ ------------
Total liabilities and stockholders' equity $ 21,027,207 $ 19,333,976
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
PSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------
1999 1998
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 7,152,084 $ 6,601,617
Cost of sales 5,672,173 5,202,593
------------------- -------------------
Gross profit 1,479,911 1,399,024
Selling, general and administrative expenses 1,190,846 1,049,307
Product development costs 51,915 54,435
------------------- -------------------
Operating income 237,150 295,282
Other expenses:
Interest expense, net of interest income 149,431 135,056
------------------- -------------------
Income before income taxes 87,719 160,226
Income tax provision -
------------------- -------------------
Net income $ 87,719 $ 160,226
Cumulative preferred stock dividend 18,250 18,250
------------------- -------------------
Net income to common stockholders $ 69,469 $ 141,976
=================== ===================
Net income per common share-basic $ 0.01 $ 0.02
=================== ===================
Net income per common share-diluted $ 0.01 $ 0.01
=================== ===================
Weighted average number of common shares-basic 10,546,818 8,841,721
=================== ===================
Weighted average number of common shares-diluted 10,579,204 9,911,080
=================== ===================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
PSI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 87,719 $ 160,226
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Bad debt expense 30,000 27,000
Depreciation 33,096 27,000
Changes in operating assets and liabilities:
Accounts receivable (2,450,129) (846,044)
Inventories 722,280 247,331
Prepaid expenses and other current assets (64,804) 45,962
Other assets (105,148) 250,685
Accounts payable 1,313,348 1,203,303
Accrued expenses 58,301 (119,701)
Notes payable (105,000)
------------ ------------
Total Adjustments (568,056) 835,536
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (480,337) 995,762
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,021) (100,738)
Advances to stockholders (8,787) (9,009)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (15,808) (109,747)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(payments to) line of credit, net 428,866 (375,476)
Proceeds from issuance of common and preferred stock, net of issuance costs 10,425 698
Principal payments on borrowings (8,467) (7,801)
Distributions to stockholders (18,250) (18,250)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 412,574 (400,829)
------------ ------------
NET (DECREASE) INCREASE IN CASH (83,571) 485,186
CASH AT BEGINNING OF PERIOD 275,987 224,680
------------ ------------
CASH AT END OF OF PERIOD $ 192,416 $ 709,866
============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of PSI
Industries, Inc., (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Operating results for the
three month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes there
to include in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. STOCKHOLDERS' EQUITY
In January 1999, the Company issued 641,500 shares of its Common Stock
to five employees in connection with the exercise of stock options. The Company
received proceeds of $576,375.
In March 1999, the Company issued 200 shares of its Common Stock to one
employee in connection with the exercise of stock options. The Company received
proceeds of $50.
In March 1999, 48,667 shares of Series A Convertible Preferred Stock
was converted into 973,334 shares of the Company's common stock, $.0001 par
value.
3. STOCK OPTION PLAN
5
<PAGE>
From January 1, 1999 to March 31, 1999, the Company granted options to
some of its employees to purchase 672,500 shares of its common stock at an
exercise price of $.90 per share.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
General
The Company was organized in 1986 to engage in the wholesale
distribution of branded cameras, photographic film, ancillary photographic
equipment and other proprietary photographic products. Since its formation, the
Company has evolved into a major national wholesaler distribution Company to
over 20,000 specialty retailers, mass-market merchandisers and wholesalers.
Since 1987, the Company's revenues have increased on an annual basis from
$1,000,000 to approximately $28,000,000 in 1998. The Company has been profitable
throughout these years except for 1997.
In 1995 management decided to focus its distribution efforts on higher
margin products such as branded cameras and ancillary photographic equipment.
Beginning in the latter part of 1995, the Company embarked on a program of
identifying, acquiring and developing a proprietary line of cameras. In 1996,
through the acquisition of exclusive distribution and manufacturing rights to
The Message Camera(TM), an innovative, single-use disposable camera which allows
for the application of full-color messages and graphics to pre-exposed film, and
the development of its Smiletime(TM) camera, a proprietary line of high-quality
35mm single-use cameras, the Company was able to add products with significantly
higher profit margins and to expand its marketing to other channels of
distribution.
Results of Operations
The following table sets forth the periods indicated the percentage of
revenues represented by certain items reflected in the Company's Statements of
Operations.
Percentage of Revenues
6
<PAGE>
Three months ended March 31,
1999 1998
---- ----
Net Sales 100.00% 100.00%
Cost of Sales 79.31% 78.81%
------- -------
Gross Profit 20.69% 21.19%
Selling, General and
Administrative Expenses 16.65% 15.89%
Product Development Costs .73% .82%
------ ------
Operating Income 3.31% 4.48%
Other Expenses:
Interest Expense, Net of
Interest Income 2.09% 2.05%
------ ------
Income (Loss) before Income Taxes 1.22% 2.43%
Income Tax Provision (Benefit) 0% 0%
------ ------
Net income 1.22% 2.43%
====== ======
Three months ended March 31, 1999 and March 31, 1998
NET SALES:
The Company's net sales for the three months ended March 31, 1999 were
$7,152,084 compared to $6,601,617 for the three months ended March 31, 1998, an
increase of $550,467 or 8.3%. The increase in net sales was primarily
attributable to an increase in the volume from existing ancillary imaging
product customers.
GROSS PROFIT:
Gross profit for the three months ended March 31, 1999 was $1,479,911
compared to $1,399,024 for the three months ended March
7
<PAGE>
31, 1998, an increase of $80,887 or 5.8%. As a percentage of sales, gross profit
decreased to 20.7% for the three months ended March 31, 1999 from 21.2% for the
three months ended March 31, 1998. The decrease in gross profit as a percentage
of sales is due to a change in the product mix, principally a substantial
increase in sales of ancillary imaging products, which carry a smaller profit
margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses for the three months ended
March 31, 1999 were $1,190,846 compared to $1,049,307 for the three months ended
March 31, 1998, an increase of $141,539 or 13.5%. As a percentage of sales,
these expenses increased to 16.7% for the three months ended March 31, 1999 from
15.9% for the three months ended March 31, 1998. Of the dollar increase, $52,231
represented increased payroll costs in connection with the hiring of additional
personnel to support the growth in sales, $52,375 represented increased
professional fees in connection with litigation, financing and other corporate
matters, $35,940 represented increased insurance expenses principally as a
result of acquiring Directors & Officers Liability Insurance, offset by a
decrease of $25,067 in advertising and promotion expenses. The remaining dollar
increase was attributable to various selling, general and administrative
expenses.
PRODUCT DEVELOPMENT COSTS:
Product Development costs for the three months ended March 31, 1999
were $51,915 compared to $54,435 for the three months ended March 31, 1998, a
decrease of $2,520 or 4.6%. As a percentage of sales, these costs decreased to
.7% for the three months ended March 31, 1999 from .8% for the three months
ended March 31, 1998.
INTEREST EXPENSE NET OF INTEREST INCOME:
Interest expense net of interest income for the three months ended
March 31, 1999 was $149,431 compared to $135,056 for the three months ended
March 31, 1998 an increase of $14,375 or 10.6%. As a percentage of sales, these
expenses increased to 2.1% for the three months ended March 31, 1999 from 2.0%
for the three months ended March 31, 1998. The dollar increase in interest
expense was attributable to increased borrowings on the line of credit required
8
<PAGE>
to finance the Company's growth.
PROVISION FOR INCOME TAXES:
For the three months ended March 31, 1999 and March 31, 1998, the
Company did not record a provision for income taxes due to the utilization of
the 1997 net operating loss carry forward.
NET INCOME:
As a result of the foregoing, net income for the three months ended
March 31, 1999 was $87,719 compared to net income of $160,226 for the three
months ended March 31, 1998 a decrease of $72,507.
TURNOVER RATIOS:
For the three months ended March 31, 1999, and March 31, 1998 inventory
turned once every three months. For the three months ended March 31, 1999
Accounts Receivable turned about every 60 days compared to 75 days for the three
months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES:
The Company has financed its cash requirements primarily through
operations, borrowings on its bank credit line and sales of its securities. The
Company also issued shares of Preferred Stock in order to finance an acquisition
of inventory during 1998.
The Company's bank credit facility currently permits borrowings of up
to $12,000,000 against a fixed percentage of eligible accounts receivable and
inventory. The interest rate on the line is at the financial institutions prime
rate or the LIBOR rate plus 225 basis points. The amount borrowed under the
credit facility varies based on the Company's cash requirements. The credit
facility is collateralized by substantially all of the assets of the Company. As
of March 31, 1999 the interest rate that was in effect was 7.75% and $6,854,279
was outstanding and classified as a short-term liability. The credit facility
terminates on September 15, 2001 and shall automatically renew itself from year
to year.
As of March 31, 1999 the Company had working capital of
$5,083,738. Operating activities used cash of $480,337
9
<PAGE>
primarily due to an increase in accounts receivable of $2,450,129 which was
partially offset by a decrease in inventories of $722,280 and net income of
$87,719. Net cash used in investing activities was $15,808 reflecting the
purchase of certain fixed assets and advances to stockholders. Financing
activities provided cash of $412,574 primarily due to an increase in the
borrowings from the Company's bank credit facility.
The Company is not currently generating sufficient working capital to
fund its projected expansion of operations. The Company believes that to create
a substantial increase in sales of The Message Camera(TM) 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 an investment banking firm to act as a placement
agent in connection with a proposed offering of up to $10,000,000 of senior
subordinated debt. As consideration for services rendered by the investment
banking firm, the Company agreed to pay a cash transaction fee of 6% of the
gross proceeds, and all reasonable out of pocket and investors' counsel
expenses. In addition, upon consummation of the financing in an amount of no
less than five million dollars, the Company will pay the investment banker fifty
thousand dollars and issue twenty five thousand shares of the Company's common
stock and issue warrants to purchase shares of the Company's common stock in an
amount equal to three percent of the investment arranged or committed at an
exercise price per share substantially the same as the one issued to investors
in the financing. As of this date, the composition of the units has not been
determined. The specific terms of the debt securities will be subject to
negotiation with potential investors. In March, 1999, the Company submitted to
the Securities and Exchange Commission a registration statement for the purpose
of raising $4,800,000 through the sale of 800,000 shares of its Series C
Preferred stock along with 800,000 Series II common stock purchase warrants.
There can be no assurances that the Company will be successful in obtaining
additional financing in connection with these or any other financing possibility
on terms acceptable to the Company, or at all.
10
<PAGE>
In March 1999 the Company signed a three year Manufacturing and Sales
agreement with Chendgu Hoist Recording Instrument CO., Ltd. And Mass Chance
Electronics. The Company is to receive a $5 million U.S. line of open credit to
purchase product from Hoist and Mass Chance Electronics. Credit will be extended
based on the interest rate per annum as published by the Central Bank of China
at the time of shipment, plus 10% of the interest rate added to the published
rate. The Company agrees to repay the obligations, 50%, 25% and 25% on each
invoiced shipment in 30, 60 and 90 days after U.S. Customs clearance,
respectively. Upon approval by the Board of Directors as security for the credit
line, the Company will issue, in escrow, an amount of preferred stock up to a
stated value of $5 million dollars. The shares of the newly created series of
preferred stock will be designated as Series D convertible preferred stock. The
preferred stock will be convertible into common stock solely upon any default in
the obligation to Hoist at a conversion price equal to the average closing bid
price of the common stock for the five trading days preceding the default. The
preferred stock will not be assigned, transferred or sold by Hoist until an
event of default occurs with respect to the obligation.
On April 6, 1999, the Company and Keepsake, Inc. entered into a
Mediated Settlement Agreement whereby the Company agreed to pay Keepsake
$850,000 within 90 days, subject to, and conditioned upon, the funding of the
Company's pending private placement in an amount not less than $4,000,000. Such
payment shall be in full and final settlement of all claims arising in actions
filed in the Circuit Court of Orange County, Florida, the U.S. District Court
for the Middle District of Florida (Orlando Division) and the Circuit Court of
Palm Beach County, Florida. This settlement included mutual covenants wherein
each party agrees not to litigate against each other, forever, for infringement
of their respective patents relating to imprinting latent images on photographic
35mm film. In the event the Company does not make payment within 48 hours of
receipt of the funding, Keepsake shall be entitled to a judgment in the amount
of $850,000 upon the filing of an affidavit of nonpayment with notice to
defendants. As a result of this agreement, the Company will capitalize all costs
and cash payments directly attributable to the use of the Keepsake, Inc patents.
Of the $850,000 being paid to Keepsake Inc., $100,000 is being borne by the
Company's product liability insurance company.
Year 2000:
11
<PAGE>
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 the date using "00" as the year 1900 rather than the
year 2000. Utilizing both internal and external resources, the Company has
converted or replaced various programs, hardware and instrumentation systems to
make them Year 2000 compatible. The Company's Year 2000 project is comprised of
two components - business applications and equipment. The business applications
component consists of the Company's business computer systems, as well as the
computer systems of third-party suppliers or customers, whose Year 2000 problems
could potentially impact the Company. Equipment exposures consist of personal
computers, system servers and telephone equipment whose Year 2000 problems could
also impact the Company. Management believes that the cost of its Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial position.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements contained in this Section and elsewhere in this
Registration Statement regarding matters that are not historical facts are
forward-looking statements. Because such forward-looking statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. All statements which
address operating performance, events or developments that management expects or
anticipates to incur in the future, including statements relating to sales and
earnings growth or statements expressing general optimism about future operating
results, are forward-looking statements. The forward-looking statements are
based on management's current views and assumptions regarding future events and
operating performance. Many factors could cause actual results to differ
materially from estimates contained in management's forward-looking statements.
The differences may be caused by a variety of factors, including but not limited
to adverse economic conditions, competitive pressures, inadequate capital,
unexpected costs, lower revenues, net income and forecasts, the possibility of
fluctuation and volatility of the Company's operating results and financial
condition, inability to carry out marketing and sales plans and loss of key
executives, amount other things.
PART II. OTHER INFORMATION
12
<PAGE>
ITEM 1. Legal Proceedings
On April 6, 1999, the Company and Keepsake, Inc. entered into a
Mediated Settlement Agreement whereby the Company agreed to pay Keepsake
$850,000 within 90 days, subject to, and conditioned upon, the funding of the
Company's pending private placement in an amount not less than $4,000,000. Such
payment shall be in full and final settlement of all claims arising in actions
filed in the Circuit Court of Orange County, Florida, the U.S. District Court
for the Middle District of Florida (Orlando Division) and the Circuit Court of
Palm Beach County, Florida. This settlement included mutual covenants wherein
each party agrees not to litigate against each other, forever, for infringement
of their respective patents relating to imprinting latent images on photographic
35mm film. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B
The following exhibits are filed as part of this report:
Exhibits:
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned as duly authorized officers of the Registrant.
PSI INDUSTRIES, INC.
By:/s/ Dominick Seminara
--------------------------------
Dominick Seminara, Chairman and
Chief Executive Officer
By:/s/ Martin Epstein
--------------------------------
Martin Epstein, Secretary,
Treasurer and Principal
Financial and Accounting Officer
DATED: May 24, 1999
14
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 192,416
<SECURITIES> 0
<RECEIVABLES> 5,764,343
<ALLOWANCES> 247,780
<INVENTORY> 11,474,821
<CURRENT-ASSETS> 18,561,106
<PP&E> 1,749,553
<DEPRECIATION> 374,976
<TOTAL-ASSETS> 21,027,207
<CURRENT-LIABILITIES> 13,467,366
<BONDS> 623,685
0
15
<COMMON> 1,160
<OTHER-SE> 6,740,655
<TOTAL-LIABILITY-AND-EQUITY> 21,027,207
<SALES> 7,152,084
<TOTAL-REVENUES> 0
<CGS> 6,672,173
<TOTAL-COSTS> 1,242,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149,431
<INCOME-PRETAX> 87,719
<INCOME-TAX> 0
<INCOME-CONTINUING> 87,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,719
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
